Shares of this company are rising upon a recent announcement to buy several solar farms in Massachusetts, as well as its planned spin-off of a yieldco.
SunEdison (SUNE)
from The Energy Strategist
SunEdison (SUNE) is the first all-solar company on the verge of spinning off an all-solar yieldco. According to the prospectus filed by with the Securities and Exchange Commission on May 28, TerraForm Power (TERP), as its yieldco will be known, will own solar projects with 524 megawatts (MW) of aggregate generating capacity in the US, Canada, UK and Chile.
TerraForm Power will also retain the right to buy additional projects with 900 MW of capacity, which would generate an additional $175 million in annual cash flow, and meet some but not all of its projected cash flow target for 2016.
The filing proposes raising up to $50 million via the IPO, outlines the goal of growing the distribution by 15% annually for the next three years, and suggests that distributions are expected to qualify as a return of capital for the next decade.
But I’m primarily interested in the IPO’s potential to propel the shares of the sponsor, which I view as the more promising play. SunEdison has gone through a wrenching transition after its solar modules business got hit with subsidized Chinese competition earlier in this decade, and it survived by shifting focus to the finance and management of primarily utility-scale US projects.
SunEdison, formerly known as MEMC, has exited solar panels and is spinning off its semiconductor wafer business. It’s hard to get a good handle on its underlying profitability, because the company has been investing heavily in new projects (and therefore racking up net losses) in preparation for the yieldco spinoff.
First-quarter revenue was up 34% year-over-year but down 40% from the prior quarter and shy of estimates.
SunEdison will retain a majority stake in TerraForm Power, and its CFO told Reuters in November the IPO could value the entire yieldco at $800 to $1 billion.
One outside estimate of the yieldco’s potential value comes from David Einhorn’s Greenlight Capital, the high-performance hedge fund that invested $184 million in SUNE during the first quarter and has already earned a 24% return on its seventh-largest position.
According to Greenlight’s April letter to shareholders, if TerraForm Power provides a yield as high as 5% and trades at a 25% discount to NRG Yield based on a valuation of 9x EBITDA, it would provide its sponsor with an implied value of $34 a share, which is 76% above a current price.
Even if Greenlight’s only half right on the upside potential, this is a bet worth taking ahead of the potential IPO catalyst. Solar power has a bright future, and SunEdison has assembled an enviable income stream that it’s about to begin refinancing with cheap equity.
While others chase yield on such terms, it could prove profitable to speculate in the sophisticated operators selling it. We’re adding SunEdison to our Aggressive Portfolio. Buy SUNE below $22.
Robert Rapier & Igor Greenwald, The Energy Strategist, www.energystrategist.com, 800-832-2330, June 13, 2014