In its report on Sunpower, Lim & Tan Research forecasts RMB250 million in net profit for FY18, which is similar to UOB Kayhian's (RMB247 million). Both use the Sum-of-Parts methodology to derive the target prices. But Lim & Tan Research has it as 95 cents while UOB KH, 77 cents. See:



Excerpts from Lim & Tan Research report

Sunpower

Share price: 
50 c

Target: 
95 c

We are initiating coverage on Sunpower Group with a BUY recommendation with a target price of S$0.95, representing an upside of 90% from current share price.

♦ The Green Investments business (GI) is Sunpower’s primary value creator and growth driver. Enormous business opportunities are available in this segment in anti-smog services in China as
(i) small pollutive boilers run by individual factories are being mandatorily closed by the government and they have to switch to centralized clean steam boilers, while
(ii) factories are increasingly relocated to industrial parks, driving high growth rates for the expansion of these parks.

 

Dec YE

FY17

FY18F

Revenue
(RMB'm)

1,965.5

2,941.2

EBITDA (RMB'm)

232.3

367.6

EBITDA
margin
(%)

11.8

12.5

Net Profit (RMB'm)

145.8

250.0

EPS (RMB)

0.20

0.34

EPS
Growth
(%)

2.5

71.5

P/E (x)

12.1

7.1

P/B (x)

1.5

1.2

ROE (%)

12.1

17.3

DPS (S$)

0.12 c

0.12 c

Dividend Yield (%)

0.2

0.2

Source: Lim & Tan Research

♦ GI is expected to transform Sunpower into a cashflow-rich utilities company.

It is the de facto monopolistic supplier of steam to factories within industrial parks through concession agreements that make it the exclusive supplier for 30 years, with the first right to renew these concessions after 30 years.

We understand that steam is a must-have product and its monopolistic model allows it to demand advance payment of tariffs.

♦ Sunpower is building up a valuable portfolio of GI assets that can generate high net present value of future cashflows and attractive double-digit IRR. With its first-mover edge, we opine that it is well-positioned to build up a scarce portfolio of valuable high-cashflow assets that, upon maturity, can be sold for a substantial premium to yield-hungry buyers such as insurance, infrastructure or state-owned funds.

GuoHongxin cu 2.2016Guo Hong Xin, executive chairman of Sunpower Group. NextInsight file photo.♦ We value Sunpower at S$0.95 as our base-case scenario target using a SOTP approach, according a P/E of 10x for its traditional M&S business (S$0.18/share) and a S$0.77/share value for the GI business.

We have assumed a conservative multiple-of-money (MoM) of 2x for its GI assets, relative to our estimate of ~3x MoM that is potentially achievable.

♦ On the back of revenue growth of 50% in FY18F, we are also expecting margins to improve and net profit to appreciate by 72% from FY17.

Currently trading at just FY18F 7.1x P/E and 1.4x P/B, we note that Sunpower's valuations are lower as compared to the average of its S-chip peers at 10.0x forward P/E and 2.7x P/B (see Exhibit 14).

However, we emphasize that we do not think that these companies are the best comparables because the returns on water sector projects are only in the single digits, as compared to Sunpower's 12-15%.

Full report here


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