Broker's take: DBS downgrades Sunpower to 'hold', warns of potential share dilution

DBS Group Research has downgraded mainboard-listed steam, electricity and heat solutions provider Sunpower Group to "hold" and adjusted its 12-month target price to S$0.49 from S$0.84, warning that the company could face share dilution if it misses its convertible bond targets amid a looming global recession.

DBS Group Research said greater uncertainty in the global financial outlook brought on by the Covid-19 crisis had increased the probability of Sunpower missing its convertible bond targets.

A 20 per cent miss from the targets would lead to a 9 per cent drop in earnings per share, the research team said.

The China-focused company has two main business segments, green investments (GI) which deals mainly with steam production and distribution, and manufacturing and services (M&S), which revolves around petrochemical equipment.

DBS Group Research lowered its forecast earnings for Sunpower's financial year 2020 by 7 per cent, citing reduced textile demand and slowing growth in the GI sector. It added that the textile sector contributes an estimated 50 per cent or more of Sunpower's GI revenue.

"While demand for steam may be sustained in early FY20 due to heating needs, it may slow in the coming months of summer as heating needs diminish and global demand for textiles slow," the research team said.

However, they added that some growth is still expected in Sunpower's GI segment from the opening of new plants and the company's orientation towards the Chinese textile market, which could largely shield it from the impact of weakened global demand.

Meanwhile, Sunpower's M&S revenues for the current financial year are expected to remain largely stable thanks to a 2.5 billion yuan (S$503 million) order book, which DBS said would sustain the segment for a year.

However, lower revenue from service concession arrangements due to reduced plant construction activity could weigh on margins, it added.

DBS Group Research also lowered its forecast for Sunpower's 2021 earnings by 14 per cent as uncertain global demand and low oil price could slow capital expenditures by petrochemical companies.

Demand for M&S products such as heat exchangers and flare gas recovery systems are largely linked to the petrochemical sector.

Sunpower shares were trading at 43 Singapore cents as at 11.27am on Monday, up 0.5 cent or 1.2 per cent.