- Impressive revenue growth indicates that SunEdison is on the right track.
- The continuously increasing demand should improve SunEdison's margins.
- The spin-off of the semiconductor business and strong balance sheet will prove to be important in the highly competitive solar market.
- The deal with Deutsche Bank should help the company to gain market share in the United Kingdom.
Solar power and semiconductor company, SunEdison (NYSE:SUNE), has soared more than 33% since my last article. The stock had gained more than 300% in 2013, and it looks like yet another strong year is in the cards for this solar player. SunEdison's prospects received a shot in the arm when the company recently reported its fourth-quarter results. It saw a solid bump in non-GAAP revenue to $960.7 million, up 36% from the year-ago period.
However, sales in the semiconductor business, which manufactures wafers used in chips for computers, mobile phones and cars, fell 10%. But, SunEdison is focused on increasing shareholder value in the long run, and this is why it is planning to spin off its semiconductor business this year so that it can focus on the solar segment. This is a good move, since SunEdison's solar segment contributes 63% of revenue.
The way ahead
SunEdison continues to focus on value creation to position itself for future growth. It considers the solar business as its biggest growth opportunity going forward. SunEdison knows what it takes to benefit from the solar industry, so it is focusing on a few basic areas for growth - high megawatt growth, extracting higher value per watt from solar installations, and strong cash flows to support the transition from building and selling projects to building and operating them.
SunEdison had over 500 megawatts (MW) under construction at the end of the fourth quarter, and there is significant demand in the market for its projects, according to management. The company is aggressively developing its solar projects and even after constructing 333MW, SunEdison's diversified pipeline is now up to 3.4 gigawatts (GW), up by about 270MW from the last quarter.
SunEdison is optimistic about its long-term megawatt growth. This growth is expected to be fueled by project demand and strategic initiatives undertaken by the company in Saudi Arabia. Also, SunEdison's vertically-integrated position and strong IT portfolio in areas such as FBR polysilicon and CCZ crystal technology should further drive growth going forward.
SunEdison is significantly capitalizing on new opportunities to optimize retained value per watt. Moreover, it is projecting a run rate of 200MW to 250MW per quarter this year. The company claims to have new opportunities to optimize value per watt that it creates and retains that value for shareholders.
At the end of the fourth quarter, SunEdison retained 127MW worth of projects on its balance sheet. Management's wise decision of retaining its projects during the quarter captured roughly an additional $160 million of value versus nothing extra if they were sold in the fourth quarter instead. Hence, the company is looking at long-term value of almost $260 million on the same projects by forgoing higher short-term profitability, giving up about $100 million in Q4 gross margins.
Also, investors shouldn't forget the $300 million or 165MW worth of retained value on the balance sheet at the end of 2013, along with 1.9GW under management, which represents a more than doubling of the year-ago level. So, SunEdison is rapidly growing its presence in the solar power industry. This should prove to be beneficial over the long run, since solar was the second-largest source of new U.S. power capacity last year, according to FERC.
Apart from the above, SunEdison is undertaking strong efforts to strengthen the balance sheet. The company significantly increased its MW completions during the previous quarter, maintained a strong construction rate, and still ended the quarter with a higher cash balance. It successfully completed a convertible note offering worth $1.2 billion, allowing SunEdison to pay off the higher interest-carrying debt. Finally, the semiconductor IPO should further reinforce SunEdison's financials.
Spinning off the semiconductor business
SunEdison plans to spin off its semiconductor business through a $250 million IPO in 2014. What's even better is that the company will be maintaining partial ownership of this project. This spin off will help SunEdison streamline its solar business and will also help it capitalize on the merchant semiconductor silicon wafer market, which is expected to grow to $12 billion by 2017 from $9 billion in 2012. Also, the spin-off is expected to generate nearly $40 million to $50 million in cash flow, which would assist financing options for solar builders.
In addition, the company recently announced a non-recourse debt financing arrangement with Deutsche Bank to construct a 56MW portfolio of four utility-scale photovoltaic solar projects in the United Kingdom. This will be the company's first foray into the U.K. market, which is expected to grow to 1.5GW in 2014. As per DECC estimates, the solar market in the U.K. can grow to over 20GW by 2020, up 1,233% from 2014's estimated growth. SunEdison has a strong backlog of 3.4GW and estimates global completions to grow to over 1,500MW in 2015, and over 2,000MW in 2016. Thus, SunEdison's foray into the U.K. market will benefit the company going forward.
So, SunEdison looks like a terrific investment opportunity going forward since it is making solid moves in the solar market. The company's strong backlog, a strong list of customers, and depth in solar power should help it perform well in the long run.