DBS Group Research analysts Woon Bing Yong and Ling Lee Keng have downgraded Sunpower Group Ltd to “hold” from “buy” with an unchanged target price of 92 cents (ex-special dividend target price of 68 cents).
“Sunpower is currently trading at a forward price-to-earnings (P/E) of 10.7 times while our target price implies a forward P/E of 11.9 times which is between Sunpower’s 5-year +1 standard deviation (s.d.) and mean forward P/E,” they write in a May 18 report.
Since the analysts’ previous upgrade on the counter, Sunpower’s share price has gained over 40% and upside from Woon and Ling’s estimated target price may be capped in the near term, as the counter awaits new catalysts.
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While Sunpower’s top line is expected to grow steadily, Green Investment’s (GI) EBITDA margin and performance for the 1HFY2021 may be weighed down by a surge in thermal coal price as management has opted to partially share the higher costs with its customers.
Even though the manufacturing & services (M&S) segment saw revenue improve 12.5% y-o-y to RMB465.2 million ($95.9 million), with its order book reaching a record high of RMB9.2 billion in the 4QFY2020, the sale of Sunpower’s manufacturing & services (M&S) looks to be on track and has received shareholders’ approval.
About 96.5% of the consideration has been escrowed with RMB1.3 billion ($269.5 million) allocated for paying a dividend of around 23.6 cents per share, representing a yield of around 28%.
Sunpower’s 1QFY2021 revenue grew 31.2% y-o-y to RMB882.8 million, led by GI revenue growth. GI revenue continues growth momentum, rising 61.2% y-o-y to RMB417.6 million as Shantou Project Phase 1 began contribution. GI revenue was also helped by an expansion in the customer base for operational projects. As a result, GI EBITDA grew 46.0% y-o-y to RMB115.2 million.
Thus, the expected slower growth without the large order book of the M&S segment may be supported by the ramp-up in GI segment operations. However, a key catalyst to watch out for would include the potential acquisition of a new plant as the Group has yet to attain its target of investing RMB2.5bn in GI equity.
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That said, the downgrade to “hold” and maintenance of discounted cash flow (DCF)-based target price of 92 cents is a conservative view due to the Group’s high debt levels. Though, the analysts note that no immediate liquidity issues are foreseen as Sunpower still has committed facilities to drawdown.
Woon and Ling also note possible risks to the views they provided such as, “unfavourable changes in the regulatory environment; steep rise in coal prices above price caps; resurgence of Covid-19; [as well as] the soft Chinese economy”.
Shares in Sunpower Group closed 4 cents higher or 4.8% up at 87 cents, or 2.2 times P/B, according to DBS’s estimates on May 18.
