SunEdison - Positive Catalysts Can Take The Stock To New Highs

May 16:

Summary

• Leveraging the success of Terra Form Power to list another yieldco - Terraform Global.
• Diversification into other renewable energy sources in high growth emerging markets.
• Strong & healthy project pipeline will support successful drop downs to the yieldcos.

I have been bullish on SunEdision for a long time, given the massive trillion dollar opportunity in the solar industry and SunEdison's leading position. After the success of Terraform Power Inc. (NASDAQ:TERP), SunEdison (NYSE:SUNE) announced an IPO of yet another yieldco TerraForm Global, Inc.SunEdison has revolutionized the solar industry by being the first solar manufacturer and developer to spin out a solar focused yieldco. It has changed the industry dynamics by lowering the cost of capital for solar projects and decreasing the costs of solar electricity generation. Other solar companies have also been scrambling to roll out their own yieldcos. SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) have announced a joint yieldco, while others like Canadian Solar (NASDAQ:CSIQ) are also planning one.

SunEdison has already filed a registration statement for the same. This yieldco will focus on the emerging markets of Brazil, China, India, Thailand, South Africa, Uruguay, Malaysia, and Peru. The new yieldco will develop and retain ownership of clean energy power plants in the wind, solar and hydro energy areas. SunEdison is the leader in the renewable energy space and the stock is already 50% up this year. Through the new IPO the company is further expanding its reach in the emerging market, which is poised to grow rapidly in the coming years. Given its renewable energy leadership position, strong project pipeline, widespread geographical reach and good stock performance, I recommend that readers continue to hold the stock and even add to their position on dips. I think there is a good possibility that the stock will see further strengthening on the listing of its new yieldco.

Why will this IPO be a success too

1) Terraform Success - SunEdison already has the experience of forming and listing a yieldco. In fact it was the pioneer in the solar industry with others joining soon. Terraform Power has performed extremely well over the last year, raising its CAFD (Cash available for Distribution) and dividend guidance to $225 million and $1.35 per share respectively. The stock is up by 32% YTD, compared to the broader NASDAQ market which returned just 4%. Terraform focuses mainly on solar projects but recently has diversified into other clean energy sources through the First Wind acquisition.

2) Strong development expertise - SunEdison is now a leading renewable energy developer globally. Not only was the company the first one to list a yieldco, it will be the only one to plan the IPO of another one. SunPower and First Solar had announced a yieldco jointly but are still to list the same. Moreover given the fact that both SunPower and First Solar are established names in the industry, they are still jointly forming the one. Other industry leading names like Canadian Solar, Trina Solar (NYSE:TSL) and Jinko Solar (NYSE:JKS) had also expressed their interest in yielcos, after being inspired by the success of Terraform but are still to come out with some concrete news.

3) From solar energy to a renewable energy leader - After acquiring First Wind, SunEdison successfully added 1.6 GW of wind energy to its existing pipeline and became a leading renewable energy provider. This new yieldco will also look to develop power plants based on other renewable energy sources like wind and hydro energy. SunEdison will acquire a total of 757 MW of renewable energy projects in the near term and 1918 MW of ROFO (rights of first offer) projects. Brazil's Renova project is the largest project and it also marks the entry of SUNE in the hydro power market.

4) New yieldco to focus on Emerging markets - This yieldco as the name suggests will focus on the emerging global markets of China, Brazil, India, South Africa, Peru, Uruguay, Malaysia, and Thailand initially. This yieldco will be unique as it will be globally diversified. Emerging markets are increasingly supporting green energy. India has plans to add 100 GW of solar energy by 2022 from around 3 GW now, while China has increased its 2015 target to more than 17 GW. Other countries in Africa and Asia are rapidly growing solar energy capacity, as solar power has become competitive with fossil fuel prices in many parts of the world.

5) Strong Project Pipeline - SunEdison has a healthy project pipeline, with 2.9 GW of backlog additions, 2.7 GW of gross pipeline additions and 774 MW under construction at quarter end. Its total pipeline today stands at a solid 7.5 GW (6 GW in solar and 1.5 GW in wind energy), and a backlog at 5.2 GW (3.8 GW in solar and 1.4 GW in wind energy).

The company plans to retain 245-270 MW of projects for Q2 2015 and 1840-2000 MW projects for FY 2015. With the project pipeline growing, the company can place more assets in the respective yieldco.

6) Good Q1 2015 performance - SunEdison has outperformed its guidance on various metrics like retained MW, total MW deployed etc. It deployed a total of 273 MW, which was an increase of 123 MW on a yearly basis. The company executed well on its M&A transactions and successfully closed the First Wind acquisition in January 2015.

Risks

Aggressive approach - In a bid to be the global leader, SunEdison is aggressively bidding for projects internationally. Debt levels have significantly gone up in 2014. In contrast the total cash at 2014 year end was only $944 million.

(figures in $ million)

Stock Performance & Valuation

SunEdison has been performing extremely well, with the stock returning ~40% in the last one year and up 49% on an YTD basis. The company is trading ~$28, which is very close to its 52 week high price. The company has a market capitalization value of $7.9 billion with P/S of 3.1x, which is on the higher side. However, given the company's impressive execution and strong growth projections, the valuation does not seem unreasonable.

SUNE data by YCharts

Conclusion

SunEdison is a leading renewable energy player today. It successfully pulled off the Terraform Power IPO and I am quite sure it will be successful with the emerging markets yieldco as well. It has diversified into other renewable energy projects. SunEdison and Terraform Power stocks have performed extremely well in the last year and will continue giving good returns. It is going ahead with plans to list another IPO, when other players have not even listed any yieldco. It is being predicted that the annual solar market installations will surge to 75 GW by 2019, from around 45 GW now. SunEdison is well positioned to take advantage of the strong long term growth of the solar market. Investors can look to buy the stock on dips.

Source: http://seekingalpha.com/article/3187136-sunedison-positive-catalysts-can-take-the-stock-to-new-highs