Analyst Warns Of Likely Near-Term Downside In SunEdison, Initiates With Hold Rating

Gordon L. Johnson of Axiom Equity Research cautioned against near-term down to

, with the stock continuing to decline despite recent evidence that the debt market and equity investors still showing interest in it. Johnson initiated coverage of SunEdison with a Hold rating. According to the Axiom report, the company needs to prove that it can "sell projects into the third-party merchant market at a double-digit profit margin," as suggested earlier by SunEdison. Although the company had earlier intended to drop these projects down to

, SunEdison has "recently begun negotiations to sell these projects into the open market," Johnson reported. Johnson also believes that the company faces a unique problem, in that it needs to convince investors that "it has profitable dropdowns for "at least" several years-2 years out," without TerraForm Power needing to issue equity. "[I]f investors cannot grasp the idea of TERP purchasing SUNE drop downs into the distant future and thus growing the dividend… the incremental investor in TERP's shares becomes non-existent," Johnson explained. In addition, the Axion report stated that investors are likely to find it difficult to quantify the downside case for SunEdison. Simply put, if TerraForm is unable to buy SunEdison's dropdowns, the latter company will be unable to develop its project backlog. However, the impact of this scenario in terms of shrink in business, opex or cash flow in future is difficult to assess. "Furthermore, how does SUNE then fund the upkeep necessary to build the sizeable portfolio of projects it currently has under construction that it previously planned on dropping down to TERP," Johnson added. On the other hand, given the large capital requirement for SunEdison to venture into the rooftop segment, Johnson expects the stock to rally if the company walks away from

.