KGI Research analyst Chen Guangzhi has kept “outperform” on Sunpower Group with a higher target price of $1.53 from $1.45 previously. The new target price is based on the discounted cash flows from Sunpower’s individual projects, as well as the special dividend of RMB1.1627 (23.59 cents) per share declared in the 1QFY2021.
Sans dividend, Chen’s target price estimate for Sunpower would have been $1.29, higher than the previous estimate of $1.22.
Sunpower Group began the year on a strong note with 31.2% y-o-y higher revenue and 17% y-o-y earnings of RMB882.8 million ($183.2 million) and RMB59.7 million respectively in the 1QFY2021 ended March.
The results stood in line with Chen’s expectations, mainly due to the contribution of the group’s Shantou Phase 1 project which commenced in the 4QFY2020.
“The overall performance met our expectation as China’s economic recovery continues,” writes Chen in a May 31 report.
“During the period, developing countries in South and Southeast Asia still suffered from rising Covid-19 infections. China’s export of goods and services surged as it was one of the few countries which maintained normalised production activities. We believe tailwinds will continue at least until 3QFY2021,” he adds.
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On his “outperform” recommendation, Chen is positive on Sunpower Group’s restructuring with the divestment of its manufacturing and services (M&S) segment to focus on its green investments (GI) business segment.
In his previous report dated Jan 13, Chen noted that the disposal of Sunpower’s M&S segment was valued at RMB2.29 billion, equivalent to 40 cents per share 12.2 times M&S’s FY2019 net profit, compared to KGI’s previous valuation of RMB1.12 billion on the business, or 17 cents per share based on an estimated net profit of RMB161 million.
At this juncture, Chen believes shareholders should see the “bigger picture” of the company as it goes through its transformation process.
The group, which entered into GI in 2015, have seen increasing revenue contribution from the segment.
As at FY2020, revenue contribution from Sunpower’s GI segment accounted for 32.9% of the group’s total revenue, which provided Sunpower with “two engines of growth” to drive its overall business.
However, the group’s decision to revert to a one-engine business model lies in the cyclical nature of the M&S segment, which is an order book-driven business.
The era of clean energy has also arrived, which means talent and capital will gradually shift away from the petrochemical industry, says Chen.
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“In terms of profitability, M&S is not comparable to high-end manufacturing like semiconductor, precise engineering, and robotics. The net margin of M&S is mid- to high-single digit.”
“On the other hand, GI provides better growth and visibility. The projects under GI own quality assets, with the average internal rate of return of more than 15%, and payback period of around eight years (concession period: 30 years). More importantly, these assets are profit-making and generating consistent positive operating cash flows,” he adds.
Furthermore, the GI segment has an economic moat that guarantees sustainability.
“Investors should understand GI’s value is the overall group’s value after the divestment of M&S is completed. We upgrade our ex-dividend TP to $1.29 from the previous $1.22 as some plants’ utilization rates are expected to increase due to accelerating economic recovery in 2HFY2021,” he says.
Shares in Sunpower closed 0.5 cent higher or 0.5% up at 96.5 cents on June 1.
