Excerpts from UOB KH 

Analysts: John Cheong & Clement Ho

Pure Green Investments Play After Sale Of M&S Business
Sunpower is selling its M&S business at an attractive valuation, which will result in a special dividend distribution of S$0.2359/share.

Sunpower

Share price: 
77.5 c

Target: 
$1.10

Post-sale, management will focus on driving greater scalability as a pure steam-power producer in China.

The GI segment has superior cash flow generation capability relative to the M&S segment, with 30-year operating concessions providing long-term revenue visibility.

Maintain BUY with an 18% higher target price of S$1.10.


WHAT’S NEW
Disposal of M&S business. Sunpower Group (Sunpower) is selling its manufacturing & services (M&S) business for Rmb2.29b.

The manufacturing-based business will be sold to a special purpose vehicle that will be owned by a consortium of China funds (64%), the group’s two largest shareholders, Guo Hong Xin and Ma Ming, and certain employees of the M&S segment (36%).

The sale price translates to 12.2x 2019 PE and represents close to 50% of Sunpower’s current market cap.

We deem the deal as attractive, at a valuation more than twice the 5-7x 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.

Special dividend proposed post-sale. Sunpower intends to pay out a special dividend amounting to Rmb1.34b, or S$0.2359/share, split into two tranches.

After which, the remaining amount will be used to repay payables due from the GI business to the M&S business of Rmb 130m, as well as Rmb551m earmarked for existing GI projects and working capital.

Redirects strategic focus on successful GI business. The 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.

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 due to:

a) 30- year operating concession rights;

b) Sunpower’s exclusive supplier status with a captive customer base; and

c) mission-critical, non-discretionary products such as steam and heating.


STOCK IMPACT
Sunpower to become a fast-growing power-producer. Currently, Sunpower has nine plants in operation and two under construction.

steam electricity8.20Sunpower’s GI business supplies industrial steam to a wide range of industries.With four of the plants acquired through M&A - almost half of its existing portfolio, M&A opportunities have been abundant and the proposed disposal would put the group in good position to source for more M&A targets.

9M20 financials reflected strong contributions from operational GI plants and the continued ramp-up of existing projects.

We expect earnings for the rest of 2020 and beyond to be driven by:

a) full-year contributions from newly-acquired GI plants;

b) additional contributions from Phase 2 of the Shantou Project and the new Xintai Zhengda plant;

c) continuous acquisition of new customers following mandatory closures of “small dirty boilers” and/or mandatory relocations into industrial parks; and

d) organic growth of existing customers and industrial parks served by the group’s GI plants.


China’s economic recovery provides favourable tailwinds. According to the National Bureau of Statistics, China’s 3Q20 GDP grew 4.9% yoy 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% yoy (1-2% yoy previously), with China being one of the few countries to be given positive growth forecasts.

With the COVID19 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 4Q20.

EARNINGS REVISION/RISK
johncheong maybank9.14John Cheong, analyst.• We maintain our revenue and EPS forecasts.

VALUATION/RECOMMENDATION
• Maintain BUY with a higher target price of S$1.10 (from S$0.92) after incorporating the net proceeds of Rmb2,021m from the disposal of the M&S business.

Our target price implies an attractive 11.4x 2021F PE.

SHARE PRICE CATALYST
• Faster-than-expected ramp-up of GI projects.
• More EPS-accretive acquisitions

 
Full report here. 


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