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Deutsche Bank Defends SunEdison, Says It Doesn't See Liquidity Event On Horizon

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Deutsche Bank Defends SunEdison, Says It Doesn't See Liquidity Event On Horizon

  • In a report issued Monday, Deutsche Bank analysts Vishal Shah and Jerimiah Booream-Phelps shared a closer looks at Sunedison Inc (NYSE: SUNE)’s liquidity situation following the company’s third-quarter results.
  • The experts assured that, “based on analysis of the recent filings and guidance,” they do not anticipate any liquidity event and thus reiterate a Buy rating on the stock given its recent weakness.
  • The firm issued a $28.00 price target on the shares, which implies an upside of more than 400 percent.
  • According to analysts at Deutsche Bank, Sunedison’s liquidity situation is looking fine after its third-quarter earnings call. They noted that the company could generate cash next year, even after spending at least $200 million in earn out payments and $170 million in debt payments. In addition, they pointed out, “the company has a $404 million margin loan due in 2017 (SUNE has already posted collateral for $250 million).”

    At the core operational level, the experts project the company “will generate cash through asset sales, devco margin improvement and opex cuts,” estimating a ~$1.85 billion gross profit.

    Related Link: Sunedison Moving Higher May Be Attributed To Unconfirmed Market Chatter Of Possible Google Stake

    Sunedison's 'Misunderstood' Elements

    The analysts went on to look at First Wind’s cash margins and cash interest expenses, two “misunderstood parts” of the Sunedison story. They noticed that, near-term, investors seems most worried about the $510 million earn-out payments related to the acquisition of First Wind, expounding that “these earn outs are part of the agreement and a sign that the company would complete construction of 1.6GW of wind projects between now and end 2016.”

    Shah and Booream-Phelps continued to explicate, “If SUNE were to sell these projects to TERP (assuming there was no dislocation in the equity markets), it would have resulted in a ~$2.5–$3 billion of cash inflow or a cash gross profit of more than $500 million. With the markets in disarray, SUNE would most likely drop these assets into one of the warehouses and since these are operating assets, it would still be able to recognize cash margins for these projects once they are in warehouse.”

    And, there is only one difference between these two scenarios, they assured: “The debt associated with the projects would be consolidated on SUNE balance sheet.”

    Can Sunedison Generate The Necessary Gross Profit?

    But, the big question for investors, they concluded, is really whether Sunedison “can generate 35c/W cash gross profit over the next 12 months, especially since the most recently reported quarter gross margin was less than 10 percent.”

    The experts noted that “while the GAAP reported gross margin was below 10 percent, it consisted of equipment kit sales to UK projects and margins on the systems sales in Q3 was indeed 15 percent of ~35c/W.”

    They assured management is still confident that “margins for projects on balance sheet are in the 35c/W range and also expects opex to decrease to 17c/W by end 2016 levels. Laser focused execution on both fronts would be required for investors to start believing in the cash flow story and for shares to start working,” they stated.

    Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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    Latest Ratings for SUNE

    DateFirmActionFromTo
    Mar 2016TerminatesHold
    Mar 2016MaintainsSell
    Mar 2016DowngradesMarket OutperformMarket Perform

    View More Analyst Ratings for SUNE
    View the Latest Analyst Ratings

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