Sale Suggests UGE’s Stock Could Have
More Upside Potential
Solar Project Valuation Report Recap
Our Sizzling Solar Project Valuations Bode Well For UGE report showed that solar projects under development sold between US$0.70/W and US$1.33/W (Exhibit 1). Based on discussions Sophic Capital has had with industry participants, we believe buyers would incur costs in the range of an additional US$1.00/W in order to bring these projects to operational status. This suggests that transaction values for operational assets could range between US$1.70/W and $2.33/W (including costs to make the project operational).
Exhibit 1: Solar Projects Under Development Have Been Traded Between US$0.70 and US$1.33/W
Source: Sophic Capital
Sophic Capital client UGE International (“UGE” or the “Company”) [TSXV:UGE; OTC:UGEIF], a developer and operator of U.S. community solar projects, today announced the sale of an operational solar project for what equates to about US$2.30/W. This news was part of a broader announcement that saw UGE also secure three new deals. Net of the debt associated with this project, the price equates to roughly US$1.10/W. Not only does UGE’s transaction support our discussions with industry contacts, which suggested meaningful value in UGE’s backlog, but it could also set the stage for investors to realize more value in UGE’s stock as projects become operational.
Figure 1 shows UGE’s US$83 million of backlog as of June 30, 2020 quarter-end. In addition, Figure 1 does not include US$21.5 million of new community solar projects in Maine announced September 16, 2020 or the US$3.1 million from 3 new projects also reported today. Based upon these additional projects, we estimate UGE’s backlog as closer to US$108 million and about 67MW of solar power generation potential post-sale of 300kW facility sold.
We remind investors that UGE’s “backlog” actually 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 24 months, and until facilities are operational, the backlog is not included in the Company’s reported financial results.
Figure 1 : UGE International’s Project Development Funnel (June 30, 2020)
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$1.33/W, and UGE just sold an operational project for a net value of US$1.10/W. However, based upon UGE’s November 16, 2020 stock price, the market is valuing UGE at about US$0.53/W (Exhibit 2), around a 24% discount to the minimum US$0.70/W peer transactions have commanded, and a much more significant discount to the higher end. Further compounding this discount is that UGE expects to have 67MW of backlog projects operational within two years. Applying US$1.10/W to UGE’s 67MW of backlog suggest UGE’s stock has room for significant appreciation. For perspective, a net valuation of US$1.10/W implies a stock price of about $3.50 to $4.00/share for UGE, all else equal and before factoring in any additional project wins.
Exhibit 2: Current Market Valuation of UGE (per Watt Basis)
Source: Company reports, Sophic Capital
UGE’s Project Sale Demonstrates Access to Non-Dilutive Cash
UGE International’s [TSXV:UGE; OTC:UGEIF] business strategy is to own and operate community solar projects it designs and finances. UGE’s sale of a 300kW operational solar project for about US$2.30/W (US$1.10/W including debt associated with the project) demonstrates that the Company has access to cheap capital, if required. The August 2020 purchase by Carlyle for an under-development project in Maine for US$1.30/W suggests buyers are willing to purchase pre deployment projects as well. That said, we are not suggesting that UGE will continue to sell projects; nor are we saying the balance sheet is stretched, but simply a willingness for buyers to purchase solar projects, which are either in development or operational at valuations significantly higher than implied by UGE’s stock price.
Management has been an excellent steward of the Company’s capital table (less than 27 million shares issued and outstanding and about 30 million fully diluted). This is not surprising given that management and insiders own about 51% of shares. Insider interests are fully aligned with shareholder interests, and should the market re-rate UGE on a per watt basis that is inline with peer transactions, all shareholders should benefit.
UGE International has contracted Sophic Capital for capital markets advisory and investor relations services.
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