Sunnova Energy Files For U.S. IPO

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About: Sunnova Energy International (NOVA)
by: Donovan Jones
Summary

Sunnova Energy International has filed to raise capital from public investors in the U.S.

The firm finances and services solar energy installations for residential customers in the U.S.

NOVA has grown quickly but losses are mounting and may dilute public investors if the IPO valuation isn't high enough.

Quick Take

Sunnova Energy International (NOVA) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an S-1 registration statement.

The firm provides solar photovoltaic and energy storage installation, financing and servicing solutions to residential customers in the US.

NOVA has grown revenue and gross profit but other financial metrics aren’t impressive and there is a significant dilution potential for public investors if the IPO valuation isn’t high enough.

I’ll provide an update when we learn more details from management.

Company & Technology

Houston, Texas-based Sunnova Energy was founded in 2012 and serves over 63,000 customers across more than 20 US states and territories.

Management is headed by Founder, President and CEO William J. Berger, who has previously founded and served as CEO of SunCap Financial and Standard Renewable Energy.

Sunnova has developed a differentiated residential solar dealer model in which the firm closely cooperates with local dealers who originate, design and install solar panels and energy storage systems on behalf of the company, thus NOVA is able to leverage dealers’ specialized knowledge, connections, and experience in local markets to drive customer acquisition.

Below is a brief overview video of the company’s marketing campaign:

Source: Sunnova

The company’s solar service agreements represent loans with an initial term of 25 years, or 10 years in the case of standalone energy storage solutions, and includes services, such as operations and maintenance, monitoring, diagnostics, repairs and replacements, equipment upgrades, and onsite power optimization for both supply and demand.

Additionally, Sunnova provides monitoring, maintenance, and repair services to consumers who have purchased their solar and energy storage solutions from unaffiliated third-parties and have signed a service agreement contract with the company.

Management claims that NOVA operates ‘one of the largest fleets of residential solar energy systems in the United States, comprising more than 455 megawatts of generation capacity.’

Below is an overview chart of the company’s customer base growth between March 31st, 2015 and 2019:

Source: Company registration statement

Investors in Sunnova Energy International included Quantum Strategic Partners, CohnReznick Capital, CIT Group, Goldman Sachs (GS), Energy Capital Partners, Triangle Peak Partners, GSO Capital Partners, and Franklin Square Capital. Source: Crunchbase

Customer Acquisition

Unlike typical dealership models, the company’s residential solar dealer model allows it to gain scale at a faster rate when entering a new market due to the company’s ability to forge relationships with existing, typically leading local businesses and avoid delay and expense required to establish new sales and installation operations.

The firm also has a direct sales desk for energy storage systems and maintenance services that offers preferred equipment pricing, among others, which NOVA sees as a complement to the company’s dealer network in case they decide not to offer energy storage service agreements or service-only agreements.

General & Administrative expenses as a percentage of revenue have been uneven in recent periods, per the table below:

General & Admin.

Expenses vs. Revenue

Period

Percentage

To March 31, 2019

69.9%

FYE June 30, 2018

64.6%

FYE June 30, 2017

71.4%

Sources: Company registration statement andIPO Edge

Market & Competition

According to a recent market research report by Wood Mackenzie Power & Renewables and the Solar Energy Industries Association [SEIA], US solar photovoltaic [SPV] installations surpassed 2 million in May 2019, and are projected to reach 3 million and 4 million installations by 2021 and 2023, respectively.

Below is an overview graphic of the US SPV installations, both quarterly and cumulative between 2010 and 2019:

US solar installations hit the 2 million mark a year after analysts had initially predicted, largely due to a drop in quarterly residential installations arising from the decline of Solar City.

According to another 2017 market research report by Allied Market Research, the global solar photovoltaic installations market was valued at $132 billion in 2016 and is projected to reach $394 billion by 2023, growing at a CAGR of 17.4% between 2017 and 2023.

A successfully-installed PV setup is capable of providing clean, safe, reliable and cost-effective power for more than 20 years with no fuel costs and maintenance.

Major factors driving industry growth include its ability to lower electricity costs on the long-term as well as growing concerns regarding climate change, which is causing a spike in demand for alternative sources of energy, thus increasing the rate of solar energy adoption.

The Asia-Pacific region, especially China and Japan, are projected to grow at the fastest rate during the period due to the presence of key market players in the area, increasing government initiatives, as well as the emergence of building-mounted and ground-mounted systems.

Sunnova competes with centralized electric utilities, retail electric providers and independent power producers as well as other solar companies with vertically-integrated business models that include sales, financing, engineering, manufacturing, installation, maintenance and monitoring services.

Major competitors that provide solar photovoltaic and energy storage services include:

  • Solar City (Tesla)

  • Brightergy

  • Sungevity

  • Vivint Solar (VLSR)

  • 8minutenergy

  • REC Group (FRA:1DP)

Source: Sentieo

The company’s dealership model enables it to penetrate a given market faster and with less marketing expenses due to the firm’s ability to leverage local dealers’ established relationships and gained knowledge.

Financial Performance

NOVA’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increased gross profit but decreased gross margin

  • Increased operating losses and negative operating margin

  • Sharply increased net losses

  • A swing to sharply negative cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To March 31, 2019

$ 26,715,000

35.0%

FYE June 30, 2018

$ 104,382,000

35.8%

FYE June 30, 2017

$ 76,856,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

To March 31, 2019

$ 16,410,000

42.4%

FYE June 30, 2018

$ 67,665,000

36.7%

FYE June 30, 2017

$ 49,516,000

Gross Margin

Period

Gross Margin

To March 31, 2019

61.43%

FYE June 30, 2018

64.82%

FYE June 30, 2017

64.43%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To March 31, 2019

$ (4,507,000)

-16.9%

FYE June 30, 2018

$ (13,730,000)

-13.2%

FYE June 30, 2017

$ (10,355,000)

-13.5%

Net Income (Loss)

Period

Net Income (Loss)

To March 31, 2019

$ (35,496,000)

FYE June 30, 2018

$ (68,409,000)

FYE June 30, 2017

$ (90,182,000)

Cash Flow From Operations

Period

Cash Flow From Operations

To March 31, 2019

$ (24,430,000)

FYE June 30, 2018

$ 11,570,000

FYE June 30, 2017

$ (48,967,000)

Sources: Company registration statement and IPO Edge

As of March 31, 2019, the company had $43.9 million in cash and $1.2 billion in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended March 31, 2019, was a negative ($254.2 million).

IPO Details

NOVA intends to raise $100.0 million in gross proceeds from an IPO of its common shares, although the final figure will likely differ.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

We intend to use the net proceeds to us from this offering, including upon exercise of the underwriters’ option to purchase additional shares, for general corporate purposes, including working capital, operating expenses, capital expenditures and repayment of indebtedness.

Management’s presentation of the company roadshow is not available yet.

Listed underwriters of the IPO are BofA Merrill Lynch, J.P. Morgan, Goldman Sachs, Credit Suisse, KeyBanc Capital Markets, Baird, and Roth Capital Partners.

Commentary

Sunnova is a leading solar finance and management company in the U.S.attempting to access public investor capital.

A number of its major investors are private equity firms who have been receiving dividends or deemed dividends. Of particular note is that Series A and C investors have received significant anti-dilution protections in the IPO.

If the IPO valuation isn’t high enough, they will receive additional shares, diluting public market investors in the process.

The firm’s financials show a mixed picture. While topline revenue and gross profit have grown, most other major financial metrics have been uneven at best and worsening in some instances.

The market opportunity for the residential SPV installation and service industry appears to be robust, so NOVA has a positive industry environment in its favor.

When we learn more information about management’s assumptions on pricing and valuation, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.