Positive on “year of transformation”
UOB Kay Hian analysts John Cheong and Clement Ho have kept “buy” on Sunpower with a higher target price of $1.11, from $1.10, after following the group’s record profit after tax and minority interests (PATMI) in 2020.
Cheong and Ho are expecting 2021 to be a “year of transformation” for the group, and have also raised their net profit forecasts for FY2021 to FY2022 to RMB466 million ($95.3 million) and RMB563.9 million respectively.
“With enhanced cash flow generation ability and long-term revenue visibility, valuations should improve going forward, in our view,” the analysts write.
As Sunpower awaits approval for its order-driven manufacturing and services (M&S) segment, it will turn its focus towards the remaining green investment (GI) business and achieving scale as an industrial steam-power producer in China.
The GI business is a stable asset-based business that generates recurring income and cash flow through the industrial infrastructure projects that Sunpower owns and operates.
“This provides relatively superior revenue visibility and certainty over the M&S segment, which is an inherently cyclical, orderbook-driven business that requires high working capital. Management sees many business opportunities in the anti-smog sector in China, due to regulatory mandated closure of high-emission polluting boilers and the structural shift to low emission centralised steam and electricity facilities,” say Cheong and Ho.
The M&S business will be sold to a special purpose vehicle (SPV) owned by a consortium of China funds, the group’s two largest shareholders, Guo Hong Xin and Ma Ming, as well as certain employees of the M&S segment.
The sale price for the business of RMB2.29 billion translates to 9.5 times FY2020 earnings and a 27% premium over the value given by two independent valuers.
“Furthermore, net proceeds per share of approximately 36.17 cents translate to 42% of Sunpower’s current market cap [will] be unlocked in cash”, note the analysts. “Overall, we deem the deal as attractive, at a valuation more than twice the 5-7 times typically ascribed by the street.”
Once the sale is completed, Sunpower will pay out a special distribution of around 23.98 cents per share or RMB1.34 billion from the net sale proceeds of RMB2.02 billion.
The remaining RMB681 million will be used as capital to undertake Sunpower’s existing GI projects and general working capital, as well as to repay payables due from the GI business to the M&S business.
Cheong and Ho also view Sunpower as a fast-growing power-producer with nine plants in operation and two under construction.
“With four of the plants acquired through M&A (almost half of its existing portfolio), acquisition opportunities have been abundant and the proposed M&S disposal would put the group in a good position to source for more targets,” they write.