Sunpower Group - UOB Kay Hian 2019-03-01: 2018 Results Above Expectation; Better Earnings Quality

SUNPOWER GROUP LTD. (SGX:5GD) | SGinvestors.io SUNPOWER GROUP LTD. (SGX:5GD)

Sunpower Group - 2018: Results Above Expectation; Better Earnings Quality

  • Sunpower Group's 2018 core net profit represents 108% of our estimate. The 117.5% y-o-y leap in core net profit was driven by a strong GI segment which led to record revenue growth of 66% y-o-y.
  • Earnings quality also improved. Full-year contribution from Green Investment (GI) plants, continued ramp-up in GI projects and strong Manufacturing and Services (M&S) orderbook should translate into a stronger 2019.
  • We raise our 2019F EPS by 7% and SOTP target price by 16% to S$0.88. Maintain BUY.



2018 RESULTS


2018 results slightly above expectations; better earnings quality.

  • SUNPOWER GROUP LTD. (SGX:5GD) reported 2018 core net profit of Rmb268m, up 87% y-o-y, driven by a 66% y-o-y leap in revenue.
  • Earnings quality has also improved on better gross margin and operating cash flow (+141% y-o-y). The strong growth was underpinned by the Green Investment (GI) segment which saw a 384.4% y-o-y surge in revenue while Manufacturing and Services (M&S) revenue rose 39.3% y-o-y.
  • Moreover, gross profit grew in tandem with revenue to Rmb286m (+70.1% y-o-y) on the back of the ramp-up in the GI segment.

M&S: Continued to grow.

  • The traditional M&S segment which supports the GI segment expansion delivered a strong performance, clocking in a 39.3% y-o-y growth in revenue to Rmb712.7m in 2018.
  • Sunpower Group’s reputable track record is proven by the strong orderbook of Rmb2.5b as at Feb 19 vs Rmb1.9b a year ago. Management said there is still room for margin improvement for this segment through better cost savings.

GI: Projects under construction are on track and expected to contribute to earnings in 2019.

  • Since the issuance of the second convertible bond and the acquisition of the Yongxing plant, Sunpower Group has seven GI projects in operation and two projects under construction.
  • We understand that the Xintai Zhengda project is expected to be completed by end-19 and the first phase of the Shantou project should contribute to earnings in 2H19.


STOCK IMPACT


Expect a stronger 2019 from full-year contribution from GI plants and continued ramp-up of existing projects.

  • Management has earmarked the GI segment as the key driver for the group.
  • In China, Sunpower Group could benefit from the mandatory closure of small boilers and relocation of factories into industrial parks which allows it to secure more customers. It will also see full-year contribution of electricity sales from the Changrun project (2018: only three months). The Lianshui project expected to achieve full operations and the Shantou project will start contributing to earnings in 2H19.


EARNINGS REVISION/RISK

  • We raise 2019 EPS forecast by 7% but maintain our 2020 EPS forecast.
  • Risks include:
    1. higher leverage from expansion,
    2. project execution risk, and
    3. forex movements.


VALUATION/RECOMMENDATION

  • Maintain BUY and raise our SOTP-based target price by 16% from S$0.76 to S$0.88, after incorporating higher utilisation rate for the GI projects. See attached PDF report for breakdown of SOTP. 


SHARE PRICE CATALYST

  • Faster-than-expected ramp-up of GI projects.
  • Higher-than-expected project wins for the M&S segment.
  • More EPS-accretive acquisitions.





John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-01
SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 UP 0.760



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