SolarCity Has More YieldCo Sensitivity Than Meets They Eye

• SolarCity Corp SCTY shares have lost 12 percent year-to-date, after a sharp decline in August from above $60 to $40.99.
• UBS analyst Julien Dumoulin-Smith maintained a Neutral rating on the company, while reducing the price target from $53 to $48.
• SolarCity’s shares do not adequately reflect the company’s exposure to the YieldCo sector, Dumoulin-Smith believes.

Analyst Julien Dumoulin-Smith said that the CAFD deployment estimates had been revised to reflect the high probability of the company meeting the top-end of its implied CAFD guidance. This indicates more than $300 million per year in organic CAFD from SolarCity’s PowerCo assets through 2017.

“Despite the higher confidence in estimates, we see the equity as having an understated exposure to the YieldCo sector, with sensitivities in our model to shifts in exit valuations driving scenarios for downside to limited Devco value,” Dumoulin-Smith wrote.

SolarCity has initiated its PACE program for the C&I market. The management has, however, “played down expectations” by indicating that a significant impact of this would be felt only after several quarters.

Dumoulin-Smith noted that recent discussions with the management had pointed towards increased focus on international expansion probably in order to meet the target of about 1 million customer by mid-2018. He added, however, “We see international expansion as risking dilution of the 'simple' US-only growth story.”

In the report UBS noted, “Following our latest NDR with mgmt, SCTY played down renewal risk based on how their contracts are setup, which is an auto-renewal with the renewal PPA at a 10% discount to the utility rate at that time.”

Dumoulin-Smith mentioned that NEM cuts and potential for fixed tariffs are likely to be “the main drivers” of lower renewal rates in about 20 years. “Bottom line, we're comfortable NEM is readily intact today, but not so much at PPA termination.”

He added that SolarCity’s shares were increasingly pricing in positive news and that the valuation reflects “full execution at the top end of its implied CAFD guidance through '17.”