Why I Believe Terraform Power Is Still A Good Buy
Summary Despite the stock price decline, fundamentals remain on track. Dividend yield has improved to 6% plus. Strong stable cash flows, geographic diversification and a good mix of generation resources. Solar Energy will continue to grow in high double digits and TERP should benefit as the largest renewable energy yieldco. Yieldcos have been criticized by a lot of industry analysts recently. Given the downturn that the energy stocks are facing currently, yieldcos have failed to deliver the promised results. Having said that, I believe that yieldcos are a safe bet because of their low risk profile and ability to generate stable and predictable cash flows. Even when the entire energy market is going through a severe downturn, they should continue paying their dividends since their cash flows are quite stable. Everything was going well for Terraform Power (NASDAQ: TERP ), the spin off from SunEdison (NYSE: SUNE ), until July this year, when prices started to fall. Though the stock is down 40% since YTD, it has been frequently increasing its dividend and CAFD guidance. The stock has a current dividend yield of more than 6% with a market capitalization of $2.6 billion. Demand for solar energy will continue to increase such that more solar projects will require financing. TERP has a good portfolio of assets increasing dividend payouts in a regular manner. Despite the recent sharp price decline, TERP has maintained its dividend guidance for 2015. While the next year may not be great in terms of growth, TERP should be a good long term holding. Here’s why I think it’s a good buy 1) Renewable Energy Market Is Growing – There is no doubt about the fact that renewable energy is set to boom in the future. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. As per the recent INDC filings, large countries will have to shift their focus toward solar, wind and other renewable forms of energy for their power needs. New solar projects will get launched in a regular manner and this will help the yieldco business model to flourish. 2) Largest Renewable Energy Yieldco – Terraform Power is well diversified with not only solar assets but also other renewable energy assets, such as wind energy projects. TERP occupies an advantageous position in the industry with a history of good performance. The company is going to slow down and consolidate, as its sponsor SunEdison is curtailing its expansion. 3) Good Liquidity Position to Support Acquisitions – Terraform Power had liquidity of ~$1.3 billion as if Q2 2015 to support further dropdowns and future targets. We currently have $1.3 billion of liquidity which is more than sufficient to support our growth needed for each of 2016 targets. We expect to use this liquidity to fund the Invenergy and Vivint Solar acquisitions, which will provide us with the capital that we need to meet our $1.75 DPS – Carlos Domenech CEO of Terraform. Source: SA Transcripts Source: TERP IR 4) Fundamental Performance Remains Quite Good – As can be seen from the table below, TERP’s performance has improved during the second quarter. The project pipeline also grew by 1 GW to reach 8.1 GW at the quarter end. 146 MW of dropdowns are expected to generate ~$21 million of unlevered CAFD annually over the next 10 years. Q1 ’15 Q2′ 15 Revenue (million $) 75 132 Adj EBITDA (million $) 52 108 CAFD (million $) 39 65 Dropdowns (in MW) 167 146 DPS ($) 0.335 5) High Yield – Terraform Power has been increasing its dividend payments as can be seen below. A yieldco primarily distributes its earnings as dividends to its investors and TERP has already achieved its full-year dividend per share target in the first quarter itself. The projected yield stands at 7.32% and the current yield is 6.32%. Date Amount 08/28/2015 0.335 05/28/2015 0.325 02/26/2015 0.27 11/24/2014 0.2257 Details of Recent dividends from Morningstar Downside Risks a) TERP’s performance is tied to SunEdison’s future performance – Though I was supportive of SunEdison’s acquisition strategy to become the leader in the renewable energy space, I agree that it has become a bit too aggressive. This has been a cause of concern for SUNE investors who have begun doubting the means to fund these acquisitions. One of the biggest risks for a yieldco is the fact that it’s heavily influenced by the actions of its sponsors. SunEdison is a strong renewable energy player today, but it needs to slow down to consolidate its acquisitions. SUNE’s stock price has taken a terrible battering after investors became alarmed over the increase in debt to finance its acquisitions. SUNE has corrected its course by canceling some of its acquisitions in India and Latin America. SunEdison’s stock price has started to stabilize after the management changed its strategy. However, TERP’s future is tied to SUNE’s performance. If it does not improve, then TERP will face a hard time in growing its assets. “We tried to do transactions the market couldn’t absorb. It started over a year ago but we got the brunt of it over the last two months.” – CEO Ahmad Chatila said in an interview. Source: Bloomberg b) Increased competition will result in higher acquisition costs – Even though the market has become slightly tough for yieldcos, there are still new ones in the pipeline. Canadian Solar (NASDAQ: CSIQ ) still plans to list its yieldco by the end of this year or early next year. There are other yieldcos such as 8point3 Energy Partners (NASDAQ: CAFD ) and NRG Yield. New yieldcos will increase competition, raising the acquisition cost for solar projects. Stock Performance and Valuation TERP stock currently trades at $18.3, which is 32% above its 52-week low price. The stock has lost 34% since the last one year and CAFD also is down 30%. The market capitalization stands at $2.6 billion, with a projected yield of 7.32% while CAFD’s stands at 4.37% . The current dividend yield of CADF is very low – a little more than 1%, while TERP’s stands at more than 6.3%. Conclusion Though the stock has been battered due to the general energy market slowdown and the skepticism around SunEdison, the yieldco has been performing quite well. Terraform Power has a lot of potential in the renewable energy space with a solid 27% diversification in wind energy. It has already achieved its full-year dividend per share target in the first quarter itself. SunEdison is a strong player in the energy market and Terraform Power will leverage from its leading position. Though there has been some unrest in the investor community I’m sure it will die soon, since solar energy is the future. Not only does yieldcos offer less volatility but are also more stable in dividend payouts. I support this yieldco platform and see the recent pullback as a good time to build a position.