FBR Looks At 8point3 - What Will This Yieldco Be Worth To First Solar?

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On April 8, FBR & Co. published a research note, "First Look at 8point3 and Implications of Successful Yield Company Launch," specifically as it relates to valuation of First Solar, Inc. FSLR. However, 8point3 Holdings Company, LLC is a 50/50 Yieldco to be jointly owned and operated by FSLR and SunPower Corp. SPWR. FBR's analysis makes it abundantly clear that this Yieldco could have a significant impact on both earnings per share (EPS) and valuation moving forward into 2017.  http://www.benzinga.com/analyst-ratings/analyst-color/15/03/5318455/5-pressing-questions-first-solar-and-sunpower-investors- FBR - No PT Change Currently FBR is maintaining its $55 price target and Market Perform rating for First Solar, in part because there are many assumptions required to be made when modeling the potential impact of 8point3 on FSLR, creating a wide range of outcomes. Tale Of The Tape - FSLR Spiked On Yieldco Announcement fslr_-_finviz_apr_8.jpg However, depending upon how many projects are added to 8point3 in addition to an initial 430 MW, plus 1.1 GW of pipeline projects where the Yieldco has a right of first offer (ROFO), FBR could realistically see future valuations of $70 to $80 per share. FBR - 8point3 Model Assumptions  Consistent with other industry Yieldcos, FBR assumes that 8point3 will pay out 85 percent of cash available for distribution (CAFD) as dividends.  FBR assumes that 100 percent of identified projects in the ROFO pipeline will drop down to 8point3.  FBR sees this resulting in CAFD between $122 million to $191 million; implying a dividend payout in the range of $104 million to 163 million.  The FBR base case assumes a total portfolio size of 1.4 GW by 2017, comprised of both utility scale assets and distributed solar systems, predominately located in the U.S. FBR - 8point3 Yieldco Ownership Assumptions fslr_-_fbrco_8pt3_ownership_0.jpg FBR assumed post-IPO "a 30%/30%/40% split among SPWR, FSLR, and public shareholders, respectively." fslr_-_fbrco_pipeline_assumptions.jpg Based on this ownership split, FBR's CAFD generation estimates, and a dividend yield of 7%, FBR estimates that "the value attributable to First Solar and SunPower individually will be between $543 million and $984 million." However, based only the disclosed ROFO pipeline of projects, FBR believes that "the value attributable would be meaningfully lower, between $446 million and $697 million." FBR - First Solar Valuation Highlights FBR chose to base its valuations on 2017, where FSLR receives the benefit of "strong free cash flow generation from the existing large utility-scale pipeline in the U.S."  FBR Current Valuation: The FBR $55 PT is based upon its "2017 EBITDA estimate of about $574 million by applying an 8x EBITDA multiple and discounting the resultant price target at a 12% COE" (cost of equity).  Most Likely Case: FBR feels that "8point3 could be worth ~$5–$10 per share to First Solar. The resulting upside scenario for First Solar is a valuation range of $69–$74 per share, which gives the company ample benefit for cash generation and moderate gross margin compression."  Blue Sky Case: FBR's blue sky scenario, where "8point3 reaches a portfolio size of 3.0 GW by 2017, assumes better disclosure from the parents, and results in a valuation range of $72–$80 per share." Notably, the FBR 26 page research report contained additional exhibits, information and clarifications regarding the logic and risks regarding these scenarios.
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