SunEdison: Pending Semiconductor Spinoff, Yield Vehicle IPO, High Solar Growth and Future Dividend – All Promise Significant Growth and Income
SunEdison (NYSE: SUNE) operates two businesses – solar energy and semiconductor materials – with one focused on developing solar power plants that generate dependable and growing streams of income with good profitability in a high-growth sector, and the other focused on the volatile, slow-growth materials segment.
The company has three primary value drivers – solar energy (with stable contracted revenues), yield vehicle (which enables securitization of contracted revenues) and its semiconductor business.
SunEdison’s solar revenue, margin and cash are recognized over the life of the solar asset with no current-period recognition, and the full retained value of a solar asset also accrues over the life of the solar asset. So, in evaluating SunEdison, it’s important to focus on MW of solar as opposed to near-term quarterly results. Moreover, with its planned yield vehicle, SunEdison should be able to monetize future streams through good-credit asset-backed securities which are actively traded, and deliver a growing stream of quarterly dividends.
On February 26, 2014, SunEdison closed debt financing (from Deutsche Bank) for the construction of four utility-scale projects in the UK, totaling 56 MW and expected to be operational by March 2014. Once complete, the portfolio will be fully acquired by London’s Foresight Solar Fund and operated by SunEdison, with an inked Power Purchase Agreement (PPA) with independent energy distributor, SmartestEnergy. This is SunEdison’s first project in UK’s fast growing solar market (UK is expected to deploy over 20 gigawatts by 2020) and reflects business expansion without impacting the balance sheet.
SunEdison should also benefit from a $49 million solar subsidy announced by the Indian government in March 2014, to help farmers install solar powered water pumps.
Spinoff of Volatile ‘Semiconductor Wafers’ business
In August 2013, SunEdison
announced plans to sell a minority stake in its semiconductor business through an initial public offering (to be held in early 2014 with Deutsche Bank and Goldman Sachs as lead underwriters), SunEdison Semiconductor will be listed as an independent publicly traded company (under ticker symbol WFR which formerly belonged to MEMC). SunEdison plans to invest proceeds from the minority sale, estimated at about $250 million, into building its solar energy business and paying down debt.
Bear in mind too that SunEdison is only selling a minority stake in its semiconductor business and will retain flexibility to raise additional capital through future share sales in SunEdison Semiconductor. This spinoff will also free-up both businesses to independently pursue growth strategies, optimal financial structures, access to capital and shareholder value enhancement.
SunEdison’s vertically-integrated semiconductor materials business
designs, develops and manufactures specialized wafers for customized printed circuit boards, including for solar energy which itself is an $18 billion semiconductor market. The company has production capacity of about 2 million wafers per month and has 12% market share. But this market is notoriously cyclical, with long ebbs and flows in demand for semiconductor wafers that lead to revenue and balance sheet instability, and operating losses.
Its solar energy business designs, develops, manufactures, installs and services solar power plants for a wide range of power generation applications across the globe. SunEdison typically gives customers access to solar power without burdensome upfront costs and recoups its investment through the sale of solar power. About 62% of the company’s revenues come from its solar energy segment.
90% CAGR Reflects True Long-Term Growth Potential
SunEdison has increased annual mega-watt (MW) completions at a 90% annual compounded rate, with 333 MW completed in Q4 2013. SunEdison also raised guidance on MW completion in
from 800 – 1,050 MW to 900 – 1,150 MW, and expects to further ramp-up completions to over 1,500 MW in 2015 and over 2,000 MW in 2016.
As opposed to short-term P&L metrics, the company’s real-growth and long-term earnings potential is reflected in MW completions. MW scale also delivers higher operating margins by driving down cost per watt.
$1 Trillion Addressable Market for Solar
The bar graph below shows projected solar installations (in giga-watts) through 2020, with the 2014 forecast already revised up by 13% over 2013 projections. Through 2020, solar capacity is expected to cumulatively exceed 500 GW with an addressable market of $1 trillion, with
installation growth in the U.S., China, Japan, Latin America and the Middle East.
In parallel, there is expected to be a market segment shift towards the higher-value residential and commercial (RSC) and distributed generation (DG) segments, with slower growth in utility scale and off-grid projects (partly because solar producers benefit from sales back to the electrical grid).
Solid Competitive Positioning, Ranked #3 Globally
SunEdison is ranked #3 globally by installations done in 2013 (542 MW), More importantly, the company is well positioned to capitalize on the market segment shift from utility scale to RSC and DG because of its overall diversity, flexible business model and low-upfront-capital approach towards new buildouts.
Large and Growing Order Backlog – 3.4 GW
SunEdison currently has a backlog of
1.1 GW under contract, with an additional pipeline of 2.3 GW where the customer has either already signed or awarded the off-take agreement or where SunEdison is in late stages of site control, interconnection point development and off-take agreement. In addition, SunEdison has qualified leads on 4.8 GW, with approved development spend and allocated resources, which are still open to competitive bidding. The company expects further growth in backlog as it completes over 900 MW in 2014, and from its early presence in high growth markets such as Latin America and the Middle East.
SunEdison’s pipeline projects are well diversified across geography (which lowers policy or region-related risks) and across project size (with a high volume of smaller projects that reduce quarter-over-quarter revenue volatility and deliver higher margins).
Solar AUM Expected to Double in 2014
SunEdison is the leading global provider of solar services to third parties, with 1.9 GW of solar assets under management in 2013. AUM is expected to jump significantly in 2014. This service capability, coupled with three 24/7 operations management centers, maximizes system uptime and cash flows, directly impacts income stability and enables yield vehicle securitization.
Operating Excellence and Growth Prospects
SunEdison is a well-established industry leader with over 90% repeat customers. Over the years, SunEdison has developed almost 900 MW of solar energy capacity across about 650 operational sites, and delivered about 800,000 MWh (megawatt-hours) of electricity while reducing CO2 emissions by almost 900 million lbs.
SunEdison has raised about $3 billion in project financing across the globe, with Power Purchase Agreements that eliminate capital outlay from customers and allow SunEdison to retain higher earnings over the long run. Through its various global projects, SunEdison has honed its planning, development and delivery model to boost efficiency and cost savings (through higher module efficiency, procurement and material cost reductions, and lower cycle times).
SunEdison has harnessed best-in-class knowhow to maximize the production of solar energy and reduce upfront capital and operating expenses. The company has multiple configurations to meet the world’s diverse climate conditions – with installations for residential rooftops, commercial rooftops to land-based solar power grid farms.
SunEdison is headquartered in Belmont, California, just a few miles away from Silicon Valley’s technology and talent pool. The company has 39 offices across North America, Europe and Asia.
High Retained Value – Sustainable, Scalable Business Model
As the bar chart below shows, SunEdison captures $1.28 per watt in value from its business model of financing projects without upfront capital outlays by customers. This value capture includes cost of capital, underwriting and residual value – on the low end of 2014 projections, that’s $1.28 * 900 MW or $1.152 billion in value capture. As SunEdison improves operating efficiencies and as raw material prices dip, margins could increase.
This cost-of-capital value add originates from SunEdison’s expertise in structured finance with sale-leasebacks, private equity partnerships, tax equities, levered partnership flips, levered lease pass-throughs and development capital.
SunEdison’s focus on yield vehicles – essentially public companies with operating assets that produce cash flow – also drives higher value, and enables dividend payments through stable earnings growth, and also drives higher multiples on valuation. SunEdison’s energy generation assets deliver long-term contracted cash flows, while asset diversification reduces cost of capital.
As a yield vehicle, SunEdison retains economic ownership of assets, derives operations and maintenance (O&M) revenues by servicing assets and captures residual value.
SunEdison plans to soon securitize solar notes backed by contracted revenue it receives from solar assets. These notes will be rated and positioned as an attractive alternative asset-backed security with income streams that are diversified by geography, industry, credit and project mix. In so doing, SunEdison will convert current and pipeline contracts into cash while lowering its cost of capital.
Strong Cash Position – up 100% over past year
SunEdison has been steadily building its cash position through sound cash management, multiple cash generation streams (such as services, yield vehicles and securitization) and by managing equity, mezzanine and debt offerings. At year end 2013, the company had $831.5 million in cash (including cash committed but not yet deployed on construction projects), up almost 100% from its cash balance at the beginning of the year.
Economics (Not Regulation) Will Drive Future Expansion and Rapid Growth
In the past, subsidies, and environmental and public policy measures drove the adoption of solar power, with funds coming from government coffers. However, with solar now a proven technology ready for mass adoption (because of lower price points and smaller form factors possible), economics will drive solar power adoption, at a pace that will be much higher than before. Growth is expected from North America, Europe, Australia, Japan and developing economies such as Brazil, Chile, India, China, Thailand and Indonesia.
While long-term economic and environmental factors will drive developed-world growth, the lack of traditional infrastructure (power line grids) and the high cost of fuel for conventional power generation will drive solar installations in developing countries – where it is easier and cheaper to place solar panels than lay power lines from struggling conventional power grids, without power line theft and with greater regional control over power generation, use and storage.
Solar deployment will accelerate in nations that have relatively dependable capital markets, with access to domestic and international financing. As such, electricity demand in the developing world is growing leaps and bounds, and is well above conventional supply.
Multiple Capital Levers Strengthen Cash Flow, Balance Sheet
The company has multiple capital levers than strengthen its balance sheet and cash position. Over the past year, SunEdison has refinanced its debt and significantly lowered interest burden with the issuance of $1.2 billion in convertible debt at an average rate of 2.4%, and used proceeds to pay a $200 million 10.75% second lien and $550 million in 7.75% bonds.
SunEdison will also gain cash from the sale of a minority stake in SunEdison Semiconductor through its upcoming spinoff and IPO. And yield vehicles will add cash from securitization of stable revenue streams from energy and services. SunEdison is also considering monetizing its semiconductor intellectual property through licensing agreements.
SunEdison’s contracted revenue is ongoing, stable and predicable, and is expected to significantly grow in 2014 through yield vehicle and approved projects, and from the servicing of assets under management which are expected to double in 2014.
History – In Brief
As background, SunEdison’s predecessor was a publicly-traded company called MEMC Electronic Materials that focused on developing wafers for the semiconductor and solar energy industries, with R&D and manufacturing facilities across the U.S., Europe and Asia. MEMC was born in 1959 as the Monsanto Electronic Materials Company, a subsidiary of U.S. based Monsanto Corp., focused on producing silicon wafers, and a pioneer at that time. Subsequently, MEMC went through several mergers and acquisitions.
In October 2009, MEMC acquired privately-held SunEdison – a developer of solar power projects and North America’s largest provider of solar energy services – for $200 million. SunEdison simplified solar by managing the financing, development, operation and monitoring of solar power plants, with no upfront capital outlay by customers.
The SunEdison acquisition added a growth engine to MEMC’s traditional wafer manufacturing business, with high demand for solar power plants and the commercialization of clean energy. The acquisition was a
brilliant extension of MEMC’s wafer manufacturing expertise to the production of solar panels and related electronics, while also ensuring a market for its solar wafers. Subsequently, SunEdison became an independent business unit within MEMC.
In May 2013, the company changed its name from MEMC Electronic Materials to SunEdison Inc.
Strong Management Team
SunEdison has a strong management team, both in solar and semiconductors, with a liberal sprinkling of successful industry veterans. The company is headed by Ahmad Chatila who has a background in electrical engineering and joined the company’s MEMC operation in March 2009 as President and CEO. Chatila subsequently turned the company’s focus to solar with the October 2009 acquisition of SunEdison, in a shrewd recognition of the volatility of the wafer business and the smart use of balance sheet to acquire SunEdison. Chatila has built SunEdison into a leading solar player, buttressed its balance sheet, and now plans to further add value through the spinoff of semiconductor operations and through yield vehicles that monetize solar revenues.
Brian Wuebbels serves as EVP and CFO, and has been with the company since 2007. Wuebbels has significant finance and operations experience, primarily in the technology sector, and has successfully developed solar industry knowledge from a finance and operations perspective.
The key here is management’s collective vision on transitioning from a volatile business to the higher growth, higher margin solar business, and using innovations such as minimal upfront capital outlays (by customers), yield vehicles, smart cash management and a spinoff to drive shareholder value.
Q4 and FY 2013 Results
In Q4’13, SunEdison completed 333 MW and exited the quarter with 504 MW under construction. Of this, the company retained 127 MW on its balance sheet, mostly for the yield vehicle, which represents $257 million of retained value and enables the capture of over $150 million of additional value above potential gross margin.
Its semiconductor materials business remained operating cash flow positive despite a challenging environment, gained revenue and volume share, and received a Supplier Excellence award from Taiwan Semiconductor (TSMC).
More recently (02/18/2014), the company filed an S-1 with the SEC for the IPO of its yield vehicle.
Q4 results reflect strong demand for solar energy, with pipeline growth despite higher completions in the quarter. Semiconductor revenue fell on lower volumes industry-wide and on continued pricing pressure.
In Q4, semiconductor materials reported net sales of $206.7 million and an operating loss of $14.7 million. Solar energy reported net sales of $344.5 million and an operating loss of $135.7 million. Per GAAP, net sales totaled $551.2 million with a gross loss of $14.2 million and an operating loss of $184.4 million. The company reported a GAAP net loss of $286.4 million or $(1.07) per share.
Solar energy GAAP results were down year/year because the company retained 127 MW on its balance sheet, with earnings also impacted by higher expenses related to growth initiatives. Q4 included a $37 million charge related to the closure of certain polysilicon and TCS facilities in Italy and $15.2 million in intangibles’ amortization and impairment charges.
However, on a non-GAAP basis, the solar energy segment had net sale adjustments of $409.5 million, gross profit adjustments of $60.9 million and net profit adjustments of $157.7 million ($0.59 per share). Non-GAAP adjustments relate to direct sale and financing sale-leaseback solar projects. As a result, on a consolidated non-GAAP basis, the company had net sales of $960.7 million, gross profit of $46.7 million, an operating loss of $123.5 million and a net loss of $128.7 million or $(0.48) per share.
Solar revenue was up year/year on a non-GAAP basis due to higher solar project sales.
For the full year, SunEdison reported non-GAAP net sales of $2.56 billion, gross margin of $181.2 million and a net loss of $202.5 million, down from FY 2012 across the board.
At year end, SunEdison had $573.5 million in cash and committed cash (for projects) of $258 million – $831.5 million in total from debt refinancing, solar project financing and working capital management. SunEdison had total assets of $6.68 billion, up from $4.75 billion a year ago, with long-term debt of $875.8 million and shareholders equity of $345.9 million which was down on lower retained earnings as a result of losses from growth initiatives.
The company made significant strides to diversify its projects globally, with a shift in MW from 65% North America to 44% North America, and from 23% EMEA & Latin America to 45%. Emerging markets will account for 11% of MW in 2014, down from 12% in 2013.
SunEdison shares are up 292% over the past 12 months, to a market capitalization of $5.63 billion which reflects bullish sentiment on MW completions, pipeline, yield vehicle and semiconductor spinoff. Shares are up 51.51% year-to-date. While shares may appear over-bought at current levels ($21.11 per share as of 03/07/2014), shares will run higher after the spinoff of the semiconductor business, the yield vehicle IPO and signs of dividend initiation, and could rise significantly as SunEdison meets milestones and improves profitability under its new organizational structure.