Sunpower Group - DBS Research 2021-01-11: A Bittersweet Goodbye

SUNPOWER GROUP LTD. (SGX:5GD)

Sunpower Group - A Bittersweet Goodbye

Sunpower Group is divesting Manufacturing and Services (M&S) business for RMB2.3bn, a fair valuation of 7.5x – 9.2x FY20F P/E. ~RMB700m gain to be booked post-sale of M&S segment.
Special dividend of S$0.2359/share post-sale offers yield of ~29%.

Sunpower Group (SGX:5GD) to receive gross consideration of RMB2.3bn in cash for sale of M&S business. See Sunpower's announcements.
Net proceeds of RMB2.0bn to be used towards paying a special dividend of S$0.2359/share (RMB1,340m), working capital purposes (RMB551m) and repayment of existing payables due by Green Investments (GI) to M&S (RMB130m).
The special dividend of S$0.2359/share represents a yield of 29.5% on Sunpower Group's share price before the announcement.
RMB2.3bn of proceeds values the M&S business at a P/E of 12.2x FY19 earnings or between 7.5x – 9.2x FY20F earnings based on our estimates.
The valuation appears fair with Sunpower trading at an adjusted forward P/E of 7.5x (FY20F, adjusted for exceptionals from convertible bonds) and 9.3x (FY19) prior to sale announcement.

Due to the M&S sale, maturity of the convertible bonds (CB) was extended from 3 March 2022 to 3 March 2023. Convertible bond targets were also adjusted to RMB325m in FY22F from RMB460m in FY21F.
New terms were inserted where the convertible bonds holders will waive any adjustments to conversion price from the performance targets if cash proceeds are received.
One option under the terms states that convertible bonds holders will waive such adjustments if they receive 2.0 times cash proceeds (including interest and special dividend) on the principal amount of the issued bonds.

We opine that Sunpower’s business model could be similar to a REIT post-M&S sale with some differences.
Sunpower’s performance would be based on steam capacity utilisation at its plants (akin to occupancy in a REIT) with expansion dependent on significant investments in plants (alike an acquisition of an investment property in a REIT).
One difference however is that steam capacity can be expanded at existing plants with incremental capex which suggests a larger ability for Sunpower to grow if demand for steam exists.

We estimate that Sunpower's borrowings post-sale would decline to RMB2.15bn by end-FY21F, a decline from RMB2.73bn as at 3Q20 due to the deconsolidation of M&S borrowings.
However, debt-to-tangible assets is expected to rise to 0.94 by end-FY21F from 0.59 as at 3Q20, mainly due to a reduction in Sunpower's cash levels when the special dividend is paid.

Overall, we believe the valuation of the M&S business is fair based on Sunpower’s valuation at the point of announcement.
Still, the increase in gearing pushes us to prefer a repayment of borrowings over the payment of a sizable special dividend as we believe it would benefit Sunpower’s long-term outlook.
That said, we do not believe there will be liquidity issues in the immediate term given that Sunpower has a committed convertible debt headroom of US$50m or ~RMB325m to issue.
Another point of concern lies with future transactions between Sunpower’s GI business and M&S business. Specifically, we think that the process of constructing or upgrading a GI plant may require M&S services. While a tender may be called, we believe that the M&S segment will win such a tender given the long-term understanding between the M&S and GI segments. This would thus represent an outflow of cash as the two segments are now deconsolidated.
A last detail to highlight would be the inclusion of a waiver where convertible bonds holders agree to waive adjustments to the conversion price if they receive cash proceeds. While we have projected that Sunpower will be able to meet the convertible bond targets, the waiver represents a possibility that Sunpower may have to pay 2.0 times cash proceeds (less any interest paid up and special dividend) on the issued bonds.

Accordingly, our ex-special dividend target price for Sunpower is S$0.70. The higher target price is attributed to a 161% revision in Sunpower's FY21 earnings forecast due to the gain from the sale of the M&S business. This is premised on the assumption that Sunpower will complete the sale of the M&S business by end-1H21. WACC was also lowered slightly on a less volatile environment.
See Sunpower Group Share Price; Sunpower Group Target Price; Sunpower Group Analyst Reports; Sunpower Group Dividend History; Sunpower Group Announcements; Sunpower Group Latest News.
Sunpower's FY22F earning forecast were revised down 39% due to the disposal of the M&S business.

Woon Bing Yong DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-01-11

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