PowerOne – A Falling Star?

 

Power One Headquarters in the US

As mentioned in previous blog posts, we have focused on the less commoditised area of the solar equipment market to build our solar exposure.  Following an excellent Q2 2012 earnings report, we wanted to dig a little deeper into PowerOne, the world’s second largest manufacturer of solar power inverters. An excellent quant service we know called Amdamax shows the stock is still cheap, plus there are big differences in forecasts which could offer an opportunity.  For example, Morgan Stanley‘s forecast is extremely low compared to others.

We believe that some of the fundamentals of this company are extremely attractive.

  •  The management has a good reputation – notwithstanding the glitch in H1 manufacturing in the United States, they have a track record of good execution.
  • They are successfully selling new products – their AuroraTrio Range three phase 20/27 product is gaining market share in impressive fashion, and at a lower cost per watt and a 98.2% efficiency rating. They are very excited about the new liquid-cooled Ultra product, which has lower material and assembly costs and thus offers best-in-class levelized cost of energy. Plus, their entry into the micro-inverter market in the fourth quarter could surprise.
  •  They are focussed on low cost production in order to reduce the customer’s costs per watt (the gross margin for Q2 improved 600 basis points compared to the first quarter).
  • On the back of their global market share of 14%, they are making a slow but successful move from EU-focused sales (particularly in Italy and Germany) to better growth markets. India’s an especially exciting new market for them, as well as Australia and the US where they resolved  manufacturing problem in June. China could soon be an attractive market for them (they’re in discussions with utilities and already manufacture there), and they’ve repeatedly said they’re looking to partner in Japan. (Watch out for our upcoming post on the Japanese market!)
  • They’re a rare solar equipment company with the financial resources to even contemplate buying back shares, with US$259 million of cash, and luckily they still have 5.3 million shares left to buy back as of June 30, 2012 (the original 10 million share repurchase authorization expires in September 21, 2012).

But every silver lining has a cloud:

  •  Investor relations is still finding his feet after only following the company for 5 months.
  •  There is little financial guidance available to investors, with only Q3 sales estimate and guidance for slightly lower gross margin versus Q2.
  •  They remained short euro going into the third quarter. This short position generated an FX gain in Q2 that may reverse during Q3 given the euro’s appreciation in August.
  •  Product sale price pressure continues (more moderately than management had expected), though volume is strong and material costs remain low.
  •  If they do decide to make an acquisition, they’ve said it would be in off-grid energy storage, which makes us wary as energy storage is a difficult business.

Meanwhile based on consensus the valuation looks attractive. In 2013, the consensus forecast for EPS was 0.59 cents, the P/E was10x, and the EV/sales was 0.46x.  Given this modest valuation plus the fact that operations are moving in the right direction, this looks fairly positive.

So far so good.  However there’s still something that makes us hesitate: although the share price has increased 48.3% year-to-date, which would warrant profit-taking at some point, volumes have been huge with 13.5% of the share capital changing hands on 7 September alone.  Strange rumours persist that the company is for sale, but this has had the counter-intuitive effect of driving the stock down rather than up.  We recently looked at Silver Lake Sumeru’s position and are concerned that they might be behind the pressure on the stock.  They are the biggest investor with 14.5% of the share capital, plus convertibles and warrants, but apparently are not allowed to own more than 19.9% of the capital.  Could it be that they are selling in preparation for future conversion of their warrants and convertibles so as not to breach that 20% barrier?  Unfortunately so long as this huge volume persists there’s a risk that PowerOne reverses a fantastic trend and becomes a fallen star.

 



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