After Strong 2020 Shareholder Returns, 2021 Could Be Another Strong Year
Sophic Capital’s report: UGE Sells Solar Facility Well Above Current Implied Valuation highlighted that peer solar projects under development sold on average for US$1.06 per watt and the market (under)valued UGE International at US$0.53 per watt (“/W”). When we published that report (November 16, 2020), Sophic Capital client UGE International (“UGE” or the “Company”) [TSXV:UGE; OTC:UGEIF], a developer and operator of U.S. community solar projects, had just announced the sale of an operational solar project for what equated to about US$1.10/W net of debt. At that time, solar projects under development had been traded between US$0.70 and US$1.33/W, excluding additional construction costs (about another US$1.00/W, based on discussions we had with industry participants). We note that UGE’s net sale value of US$1.10/W was in-line with the average of industry transactions at US$1.14/W.
More peer transactions for solar projects under development have recently occurred, increasing the average value to US$1.14/W (Exhibit 1).
Exhibit 1: Solar Projects Under Development Have Traded Between US$0.70 and US$1.50/W
Source: Sophic Capital
Exhibit 2 shows UGE International’s US$112 million project backlog (in development and deployment) as of January 17, 2021. We remind investors that UGE’s “backlog” represents the net present value (“NPV”) of discounted cash flows across the Company’s portfolio of projects. UGE’s backlog refers to the unlevered (excluding debt) NPV of committed projects, less value already realized, or the present value of all of UGE’s projects, ignoring the debt required to finance the projects today. UGE expects to operate these projects within an average of 24 months, and until facilities are operational, the backlog is not included in the Company’s reported financial results.
As of UGE’s most recently reported quarter, which ended on September 30, 2020, UGE had 63MW of solar project backlog. We note that this backlog excludes a 5.4MW project with an estimated US$9.9 million NPV announced on January 4, 2021. Based upon these additional projects, we estimate UGE’s backlog as closer to 68MW of solar power generation potential.
Exhibit 2: UGE’s Project Development Funnel
Market is Undervaluing UGE Versus Recent Project Sale and Peer Transactions
Exhibit 1 showed that solar projects under development have sold for between US$0.70/W and US$1.50/W. However, based upon UGE’s February 17, 2021 stock price of C$2.49 per share, the market is valuing UGE at about US$0.78/W (Exhibit 3), around a 31% discount to the average US$1.14/W peer transactions have commanded, and closer to the low end of these transaction values.. NOTE: This pro forma market valuation includes:
- 2.7 million new shares resulting (including over allotment) from the January 25, 2021 C$6.1 million bought deal financing;
- C$7 million gross cash infusion (including over allotment) from the January 25, 2021 bought deal financing;
- No changes to the $0.9 net debt balance published in the January 17, 2021 investor presentation;
- 555,556 new shares resulting from the December 23, 2020 closing of the C$1.6 million (gross) private placement;
- C$1.6 million gross proceeds from the private placement added to the net cash balance (unknown post Q3/20);
- USD/CAD = 1.27
Exhibit 3: UGE PRO FORMA Market Valuation (per Watt Basis) Shows it Could Be Among Solar Stocks to Buy Versus Peers
Source: Company reports, Sophic Capital
Valuing UGE Projects at US$1.14/W Industry Valuation Average
Applying US$1.14/W to our pro foma 68MW backlog estimate suggests UGE’s stock has room for meaningful appreciation from it’s current C$2.49 per share. For perspective, a net valuation of US$1.10/W implies a UGE stock price of about $3.25 to $3.50 per share (or upside of about 36% at the mid-point of that range from current levels), all else equal and before factoring in any additional project wins.
New project wins provide more potential upside. UGE’s January 2021 presentation discloses that the 63MW in committed projects has a value of US$112.1 million. Adding the 5.4MW project could add about US$9.9 million of NPV, with our C$3.25 to $C3.50 per share estimate, representing about 68MW generating roughly US$122 million. UGE’s January 2021 presentation also discloses a US$250 million pipeline, representing projects that the Company could win over time. Applying back-of-the-envelope math to these potential wins, UGE could add another C$6.50 to C$7 per share value in addition to our current C$3.25 to C3.50 per share estimate.
Furthermore, the Biden Administration’s increasing support for the solar sector, including a 2-year extension for the U.S. Investment Tax Credit (“ITC”). This extension increases the credit to 26% for 2021 and 2022 versus the prior 22% and 10% (respectively) and bodes well for valuing UGE’s project backlog. We would not be surprised if solar project valuations increase industry-wide, as these credits will enhance the cash generated by solar projects when they are operational, thus making them more attractive to potential buyers and investors.
Final Thoughts – Add UGE to Your Canadian ESG Microcap Stocks List
UGE International’s [TSXV:UGE; OTC:UGEIF] insiders own almost 50% of shares issued and outstanding. Insiders participated in December’s C$1.6 million (gross) private placement AND have recently bought shares in the open market. The Company further strengthened its balance sheet with a C$7 million (gross) bought deal financing announced January 25, 2021 and closed February 17, 2021.
UGE benefits from low share count. For years, UGE’s management have maintained a lean capital structure, periodically taking advantage of debt opportunistically and being prudent with equity issuances. Even post the C$7 million bought deal financing that closed February 17, 2021, UGE has about 30 million shares issued and outstanding. This low share count means shareholders have benefitted over the past 9 months as management has executed on the business plan. Share scarcity counts!
Federal tax investment credit (“ITC”) extended. At a basic level, a tax credit reduces the taxes that an enterprise pays. U.S. commercial solar projects tax credits were expected to decline to 22% in 2021 and 10% in 2022 but are now 26% for both years. As we have highlighted previously, we believe this bodes well for solar project valuations across the board.
UGE’s pipeline of opportunities continues to grow, which will benefit share valuation (all else being equal). Backlog of projects grew over 200% in 2020 and continues to grow.
Sophic Capital considers all of these points beneficial to increasing the value of UGE International stock. While UGE may not be as well known today as First Solar (NYSE FSLR) or as highly valued as SUNS stock – the stock has rewarded investors in 2020 and appears to have additional upside that has yet to be realized. Anyone focused on microcap investing or ESG stocks may want to add TSXV:UGE and OTC:UGEIF to her list of Solar Stocks to invest in for 2021.
Disclosures
UGE International has contracted Sophic Capital for capital markets advisory and investor relations services.
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