Sunpower inks steam supply deal in China

Singapore

MAINBOARD-LISTED Sunpower Group is buying four sets of boilers for 100 million yuan (S$20.5 million) from a Chinese textile company, the board said on Tuesday.

The move came as KGI Securities and DBS Group Research upgraded their target prices, while keeping their respective "outperform" and "buy" recommendations on the stock.

In a related steam supply right contract, a wholly-owned Sunpower subsidiary will become exclusive steam supplier to vendor Hebei Sanli Group for 25 years, unless it cannot provide the steam volume or quality needed.

Sanli also committed to maintaining the location and production levels of its operating sites in Hebei province's Gaoyang county for the duration of the agreement, and will not develop any business related to thermal power supply in the county.

Sunpower's board called the latest transaction "in line with the group's medium- to long-term strategy" for its green investment (GI) business.

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"Barring unforeseen circumstances, the addition of new steam demand from Sanli with the 25-year exclusive supply rights present an additional source of recurring revenue and income for Sunpower, and can be expected to have a positive impact on the group's long-term performance," it said. It will make an update on the potential financial effects of the deal when the transaction is completed.

Meanwhile, Sunpower had earlier said it would divest its manufacturing and services (M&S) segment for some 2.3 billion yuan, and use about 1.3 billion yuan of the net proceeds for a proposed special dividend.

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

The ex-dividend target price was likewise 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.

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 that 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.

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