Back in the summer, SUNE was a hedge fund darling and in the portfolio of virtually every aggressive asset manager: a true hedge fund hotel.
Since then it has plunged by 90% on both concerns about fundamentals and hedge fund liquidations and margin calls. Just yesterday, the stock plunged another 34% beginning the question which hedge fund is still long and is about to get another major margin call.
In any event, as @the_real_fly says, "it will SUNE be over" and perhaps catalyzing the ending is a brand new note by Axiom Capital Research titled "The Nightmare Before Christmas” – Credit Event Appears More Likely than Presaged, in which the analyst Gordon Johnson sees at least another 33% of downside before the stock finally stabilizes at something resembling a fair value of $2.00
Here are the highlights:
- Credit Risk Appears Worse-than-Forebode. After some pressure from a number of SUNE pundits following our downgrade of the shares last week (given SUNE’s shrs had already moderated -75% vs. +1% for the S&P 500 over the same timeframe), we decided to do another “scrub” of the company’s 10-Q published 11/9. Following this exercise, we are even more resolute in our subdued outlook, SELL rating, and yr-end C16 PT of $2/shr (34% downside). Why? Five reasons, namely:
- (1) when excl. cash committed for construction projects, SUNE has just ~$600mn in cash for general corporate purposes (which we now blv may not be enough to sustain SUNE through 2Q16) – Ex. 2,
- (2) SUNE’s decision to borrow $169mn in 1yr paper from Goldman Sachs (GS; NR) in 3Q15 at a 15.4% interest rate (incl. $9mn prepayment) to put up collateral, we blv, for the 8/11/15 $152mn margin call on its $410mn Deutsche Bank (DB; NC) loan (an addtl. $91mn of collateral was required from SUNE 10/15 [Ex. 3], and we surmise more since then with the fall in Terraform Power’s shrs [TERP; NC]), pointing to emergency cash needs as recently as 3Q15 – who borrows 1yr paper at 15.4%?, (Ex. 4), other than a distressed company,
- (3) Renova’s right to put 7mn of GLBL shares to SUNE at a price of $15/shr 3/31/16 (a $105mn liability) – Ex. 5,
- (4) SUNE’s potential obligation to buy ~16% of Renova for $250mn using its own shares (i.e., 83mn shrs), suggesting sig. dilution to equity holders in the offing – Ex. 6, &
- (5) TERP’s recent revelation that it put up ~27% (i.e., $388mn) of the capital necessary to fund the Invenergy Warehouse, implying SUNE’s aspirations for ~$6bn in Warehouse funds to “house” its ~3GW in projects being developed may require a ~$1.65bn cash infusion (Ex. 7). Barring unforeseen incremental cheap funding in the offing, we see a credit event as likely before 3Q16.
- Valuation. Our yr-end C16 PT remains $2/shr (34% downside). While more valuation detail is below, with acute stress on its core biz at present, & shortcomings selling huge amounts of projects into the secondary mrkt over a short period of time thus far, we blv SUNE will miss ~3.5GW developed in C16. Using ([1.42GW × $0.18 (op. prof.) - $150mn interest × 70% (tax)] ÷ 316mn shrs) = $0.23/shr in dev. co. EPS, & applying a 9x P/E multiple (assumes 15% DevCo GM into perpetuity; likely high given 9.6% 2Q DevCo GM), SUNE is worth $2.
