UOB Kay Hian Research’s John Cheong and Clement Ho have maintained their “buy” call on Sunpower Group with a raised target price of $1.10, up from its previous target price of 92 cents.
In a Jan 11 note, Cheong and Ho said Sunpower is selling its manufacturing & services (M&S) business for RMB2.29 billion ($468 million).
See: Sunpower disposes manufacturing and services business for $463.0 mil
The sale price translates to 12.2x 2019 price-to-earnings (P/E) and represents close to 50% of Sunpower’s current market cap.
To Cheong and Ho, the deal is “attractive”, as it gives the company a valuation more than twice the 5 to 7 times value ascribed by the street. Furthermore, the disposal of the order-driven M&S business will leave investors with the remaining power-producing-related green investments (GI) business, which offers greater revenue visibility and certainty.
The sale will also result in Sunpower intends to pay out a special dividend amounting to RMB1.34 billion, which translates to 23.59 Singapore cents per share. The dividend will be split into two tranches. After which, the remaining amount will also be used to repay payables due from the GI business to the M&S business of RMB130 million, as well as RMB551 million earmarked for existing GI projects and working capital.
Moving forward, the analysts think that the group’s GI business has significantly more potential to deliver long-term sustainable benefits to the group due to its proven capacity to deliver sizeable recurring income and cash flow.
They note, “Unlike M&S which is an inherently cyclical, order book-driven business that requires high working capital, GI has the ability to generate recurring cash flow that is sustainable over the long term.
They said this is due to a 30-year operating concession right, Sunpower’s exclusive supplier status with a captive customer base; and mission-critical, non-discretionary products such as steam and heating.
Furthermore, Cheong and Ho note that Sunpower has nine plants in operation and two under construction currently. With four of the plants acquired through M&As, they think M&A opportunities have been “abundant” and the proposed disposal would put the group in a good position to source for more M&A targets.
They elaborate 9MFY2020 financials reflected strong contributions from operational GI plants and the continued ramp-up of existing projects.
As such, they expect earnings for the rest of 2020 and beyond to be driven by factors including full-year contributions from newly-acquired GI plants, and organic growth of existing customers and industrial parks served by the group’s GI plants.
More broadly, they think China’s economic recovery provides favourable tailwinds. According to the National Bureau of Statistics, China’s 3Q2020 GDP grew 4.9% y-o-y and the economy is on track for a full recovery.
Furthermore, the International Monetary Fund and Oxford Economics have increased their GDP growth forecasts for China to 1.9-2% y-o-y, with China being one of the few countries to be given positive growth forecasts.
“With the Covid-19 pandemic relatively under control in China, we believe Sunpower is in a favourable position to benefit from the full resumption of economic activity in China and will post strong results for 4QFY2020,” they conclude.
DBS Group Research analysts Woon Bing Yong and Ling Lee Keng have also rated “buy” on Sunpower Group with a higher target price of 94 cents, up from 76 cents previously, to reflect the one-off gain from the sale of its M&S business in FY2021F.
The company’s weighted average cost of capital (WACC), on the other hand, was lowered to reflect the less volatile environment, they write in a Jan 11 report.
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Despite recommending investors to accumulate the stock due to its low valuation, where Sunpower’s FY2021F adjusted P/E of 6.7 times remains below the stock’s five-year forward P/E mean of 9.1 times, Woon and Ling say they are more conservative on the stock given Sunpower’s high debt levels.
That said, they add they do not foresee any “immediate liquidity issues” as the company still has committed facilities to draw down from.
Following its M&S sale, Woon and Ling see longer-term prospects to the counter, with Sunpower’s business model pivoting towards a REIT-like model with some differences.
“Sunpower’s performance would be based on steam capacity utilisation at its plants (akin to occupancy in a REIT) with expansion dependent on significant investments in plants (alike an acquisition of an investment property in a REIT),” they say.
“One difference, however, is that steam capacity can be expanded at existing plants with incremental capex which suggests a larger ability for Sunpower to grow if demand for steam exists,” they add.
As at 11.57 am, shares of Sunpower were trading at 84 cents, with an FY2020 price to book ratio of 1.3 and dividend yield of 0.3%.
