Goldman Reinstates TerraForm Power At Neutral, But Is Selling TerraForm Global

Sunedison Inc SUNEQ filed for bankruptcy on April 21. Goldman Sachs' Brian Lee reinitiated coverage of TerraForm Power Inc TERP with a Neutral rating and a price target of $10, while maintaining a Sell rating for TerraForm Global Inc GLBL and a price target of $1.50.

The current price target for TerraForm Power reflects 7 percent total return, versus Goldman Sachs' solar coverage average of 10 percent. The DPS estimates for TerraForm Global have been lowered to reflect a smaller operating portfolio mainly on account of SunEdison’s inability to deliver select projects, analyst Brian Lee mentioned.

TerraForm Power: Concerns Over Delevering

TerraForm has significant underlying cash flow, given its long-term contracts. Therefore, despite significant leverage, the company is unlikely to face liquidation issues similar to parent SunEdison in the foreseeable future, “with the most near-term maturity on debt that is recourse to the company occurring in 2020,” Lee wrote.

He added, however, that SunEdison’s bankruptcy does pose unique risks and increased uncertainty around operational execution in the near- to medium-term.

“We see a challenged sponsor limiting near-term dividend growth – we forecast 1% DPS growth from current levels through F2018,” the Goldman Sachs report noted. Moreover, dependence on SunEdison for back office and financial reporting functions has caused TerraForm Power to delay its financial filings for 2015 10-K.

TerraForm Global: Dividend Cut In Store
The DPS estimates for FY16, FY17 and FY18 have been reduced by 31-42 percent to $0.76, $0.64 and $0.64, respectively. The Sell rating reflects lower comp target yields, Lee mentioned.