Redstone's Iyer Upgrades SunEdison Semi, Sees Potential To Double

Redstone has upgraded Sunedison Semiconductor Ltd SEMI to Positive from Sell saying that it sees a very distinct possibility of the company being taken out given its recent public announcement that is exploring strategic alternatives.

"Whilst we had always articulated multiple times previously that industry consolidation was the only salvation, the recent share price drop to an all-time low reflecting a market cap~$150m for a company that is likely to do $800-$900m in revenues this year, just accelerated the inevitable," analyst Jagadish Iyer wrote in a note to clients.

Iyer sees two possibilities: either a consolidation with a competitor or a takeout by a Private Equity. His upgrade is also predicated on the inflection he sees in terms of wafer volumes and increasing conviction on price stability as we look at 2016, which he had communicated to investors early February.

"Given that the industry has 4 other major players (Shin Etsu, Sumco, Shin Etsu, LG Siltron), by mere elimination, we can speculate Siltronics (Not Rated) to be a plausible acquirer as it consolidates its market share to 25-27% from low to mid-teens," Iyer noted.

This consolidation should ensure robust volumes while providing greater pricing stability and a stable alternate source to non-Japanese supply. The analyst's merger analysis suggests earnings accretion about 90 percent to Siltronics based on modest cost synergies.

"Despite the massive share price uptick of over 50% since the recent announcement, we see huge upside to share price even further from current levels if the takeout happens based on a) replacement value analysis wherein even applying a 75% discount, shares could be worth ~$12 (>90% upside) and b) applying a Price/Sales ratio of 0.6x for the peer group, which in turn would translate into a price of $12," Iyer said.

The analyst also raised his price target to $13 from $6.50. The stock is currently up 3 percent.