fbpx

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:

  • C$7 million gross cash infusion (including over allotment) from the January 25, 2021 bought deal financing;
  • 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.

Disclaimer

The information and recommendations made available through our emails, newsletters, website and press releases (collectively referred to as the “Material”) by Sophic Capital Inc. (“Sophic” or “Company”) is for informational purposes only and shall not be used or construed as an offer to sell or be used as a solicitation of an offer to buy any services or securities. In accessing or consuming the Materials, you hereby acknowledge that any reliance upon any Materials shall be at your sole risk. In particular, none of the information provided in our monthly newsletter and emails or any other Material should be viewed as an invite, and/or induce or encourage any person to make any kind of investment decision. The recommendations and information provided in our Material are not tailored to the needs of particular persons and may not be appropriate for you depending on your financial position or investment goals or needs. You should apply your own judgment in making any use of the information provided in the Company’s Material, especially as the basis for any investment decisions. Securities or other investments referred to in the Materials may not be suitable for you and you should not make any kind of investment decision in relation to them without first obtaining independent investment advice from a qualified and registered investment advisor. You further agree that neither Sophic, its, directors, officers, shareholders, employees, affiliates consultants, and/or clients will be liable for any losses or liabilities that may be occasioned as a result of the information provided in any of the Material. By accessing Sophic’s website and signing up to receive the Company’s monthly newsletter or any other Material, you accept and agree to be bound by and comply with the terms and conditions set out herein. If you do not accept and agree to the terms, you should not use the Company’s website or accept the terms and conditions associated to the newsletter signup. Sophic is not registered as an adviser or dealer under the securities legislation of any jurisdiction of Canada or elsewhere and provides Material on behalf of its clients pursuant to an exemption from the registration requirements that is available in respect of generic advice. In no event will Sophic be responsible or liable to you or any other party for any damages of any kind arising out of or relating to the use of, misuse of and/or inability to use the Company’s website or Material. The information is directed only at persons resident in Canada. The Company’s Material or the information provided in the Material shall not in any form constitute as an offer or solicitation to anyone in the United States of America or any jurisdiction where such offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation. If you choose to access Sophic’s website and/or have signed up to receive the Company’s monthly newsletter or any other Material, you acknowledge that the information in the Material is intended for use by persons resident in Canada only. Sophic is not an investment advisor nor does it maintain any registrations as such, and Material provided by Sophic shall not be used to make investment decisions. Information provided in the Company’s Material is often opinionated and should be considered for information purposes only. No stock exchange or securities regulatory authority anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. Sophic and/or its principals and employees may have positions in the stocks mentioned in the Company’s Material and may trade in the stocks mentioned in the Material. Do not consider buying or selling any stock without conducting your own due diligence and/or without obtaining independent investment advice from a qualified and registered investment advisor. The Company has not independently verified any of the data from third party sources referred to in the Material, including information provided by Sophic clients that are the subject of the report, or ascertained the underlying assumptions relied upon by such sources. The Company does not assume any responsibility for the accuracy or completeness of this information or for any failure by any such other persons to disclose events which may have occurred or may affect the significance or accuracy of any such information. The Material may contain forward looking information. Forward-looking statements are frequently, but not always, identified by words such as “expects,” “anticipates,” “believes,” “intends,” “estimates,” “potential,” “possible,” “projects,” “plans,” and similar expressions, or statements that events, conditions or results “will,” “may,” “could,” or “should” occur or be achieved or their negatives or other comparable words and include, without limitation, statements regarding, projected revenue, income or earnings or other results of operations, strategy, plans, objectives, goals and targets, plans to increase market share or with respect to anticipated performance compared to competitors, product development and adoption by potential customers. These statements relate to future events and future performance. Forward-looking statements are based on opinions and assumptions as of the date made, and are subject to a variety of risks and other factors that could cause actual events/results to differ materially from these forward looking statements. There can be no assurance that such expectations will prove to be correct; these statements are no guarantee of future performance and involve known and unknown risks, uncertainties and other factors. Sophic provides no assurance as to future results, performance, or achievements and no representations are made that actual results achieved will be as indicated in the forward looking information. Nothing herein can be assumed or predicted, and you are strongly encouraged to learn more and seek independent advice before relying on any information presented.