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Broker's take: KGI, DBS raise TPs for Sunpower on M&S divestment

KGI Securities and DBS Group Research have upgraded their target prices for Sunpower Group, but have maintained their respective "outperform" and "buy" recommendations on the stock.

To recap, Sunpower intends to divest its manufacturing and services (M&S) segment for some 2.3 billion yuan (S$463.3 million), and will use about 1.3 billion yuan of the net proceeds for a proposed special dividend.

KGI analyst Chen Guangzhi raised his target price to $1.45 from S$0.91 previously after incorporating discounted cash flows for Sunpower's green investment (GI) segment, as well as the group's intended special dividend of 23.59 Singapore cents per share.

The ex-dividend target price has likewise been raised to S$1.22 after factoring in the group's Tongshan Phase 1 and Xinjiang Phase 1 projects.

Mr Chen believes Sunpower will be "better appreciated by the market for its high-quality GI business segment" after the disposal. This also makes the counter a standalone pure-play anti-air-pollution environmental protection company, he wrote in a Tuesday report.

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In particular, he sees more opportunities for growth in the GI segment, such as favourable policy support and upsizing environmental protection requirements. This is as opposed to the M&S segment, which is limited by the cyclical businesses it serves as well as tight production capacity, said the analyst.

Due to the characteristics of Sunpower's GI businesses, Mr Chen said there is also more visibility in this segment over M&S.

"The M&S segment is reliant on the tireless replenishment of its order book to grow, but once a GI project has commenced, it will consistently generate a stable recurring income for decades," he said.

DBS analysts Woon Bing Yong and Ling Lee King have raised their target price for Sunpower to S$0.94 from S$0.76 to reflect a one-off gain from the sale of the M&S segment in FY2021. The ex-dividend target price is S$0.70.

In a Monday report, they wrote that Sunpower's valuation at a FY2021 adjusted price-to-earnings (P/E) mean of 6.7 times is low, as it remains below the stock's five-year forward P/E mean of 9.1 times at the Jan 8 share price of S$0.82.

The revised estimates notably reflect a slightly lower weighted average cost of capital (WACC) due to a less volatile environment, while their FY2022 earnings projection has been lowered 39 per cent after the disposal of the M&S business.

Noting healthy growth in China's Nov 2020 retail sales data, they estimate the strong demand for textiles will indirectly contribute to 40-50 per cent of the group's GI revenue.

"China's green push could accelerate movement into industrial parks, which GI plants serve. The segment's convertible bond profit targets also serve as an incentive to clinch new plant projects or embark on mergers and acquisitions," said the analysts.

"We are more conservative on the stock, given the group's high debt levels. That said, we do not foresee any immediate liquidity issues as Sunpower still has committed facilities to draw down," they added.

Shares of Sunpower closed 10 Singapore cents or 11.7 per cent higher at 95.5 cents on Tuesday.

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