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Broker's take: DBS initiates coverage on Sunpower with 'buy', S$0.81 target price

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DBS Equity Research has initiated coverage on China-focused Sunpower Group with a "buy" call and a target price of S$0.81.

DBS Equity Research has initiated coverage on China-focused Sunpower Group with a "buy" call and a target price of S$0.81.

In a report on Monday, DBS analyst Ling Lee Keng cited the growth and stability of the mainboard-listed company's new green investments (GI) business as well as expectations of organic growth for its existing plants.

Based in China, Sunpower's GI plants generate steam, heat and electricity. The company's other main business segment is in manufacturing and services (M&S).

The GI business offers resilience due to its large exposure in defensive industries, and the segment is also aided by supportive government regulations and a global push for environment protection, Ms Ling wrote.

Moreover, given its first-mover advantage, Sunpower has a natural monopoly in the areas that its GI plants serve. "We think competitors are prevented from building new plants near Sunpower’s existing plants due to direct competition, regulatory hurdles and poor economics," Ms Ling noted.

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This monopoly coupled with the company's highly efficient steam distribution networks give Sunpower greater bargaining power with its customers, which enables it to obtain higher prepayments from customers and generate high GI operating cash flows, she wrote.

The GI business segment contributed 23 per cent of group revenue and 46 per cent of operating profit in fiscal 2018, and will be the earnings driver going forward.

DBS expects Sunpower to invest a further 2.3 billion yuan (S$444.1 million) in GI assets by 2021 to reach its equity investment target of 900 million yuan. These new investments may potentially generate about 970 million yuan in revenue and 275 million yuan in operating income.

Additionally, the likely growth of its plant utilisation, combined with the steady closure of small boilers and shifting of businesses to industrial parks will drive organic growth for its existing plants.

 

That said, despite Sunpower's monopoly, its GI plants in China are still subject to price caps on steam, set by the local Chinese government. The plants burn coal as fuel to supply steam to customers, which means that a key risk lies in any unexpected rise in coal prices, which will hurt Sunpower's gross profit margins as it cannot raise steam prices above the caps.

As for Sunpower's M&S segment, DBS expects it to remain robust with both local and global demand for petrochemicals driving orders.

The company's M&S factory is operating at close to full utilisation on an order book of 2.5 billion yuan. This enables Sunpower to cherry-pick higher margin projects while keeping its order book steady, Ms Ling wrote.

DBS expects Sunpower to continue its strong top-line expansion, after revenue grew 66 per cent year on year in fiscal 2018 on the back of strong performance in both the M&S and GI segments.

"Going forward, we expect the revenue growth momentum to be sustained by new plant acquisitions and construction in the GI segment," Ms Ling said.

"Revenue growth for M&S however may plateau as M&S factory utilisation is operating at peak capacity."

Shares of Sunpower were trading up S$0.005 or 0.8 per cent at S$0.595 as at 10.58am on Monday.

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