Solar, Yieldco Concerns 'Overdone', Says Deutsche Bank (SUNE) (TERP) (SPWR) (SCTY)

Deutsche Bank earlier reiterated Buy ratings on SunEdison (NYSE: SUNE), TerraForm Power (NASDAQ: TERP), SunPower (NASDAQ: SPWR), SolarCity (NASDAQ: SCTY). Analyst Vishal Shah pointed out that solar and yieldco stocks have been pressured lately on concerns related to rising yields and the resulting slower growth of some of the yieldcos. In his view, concerns are "overdone."

Shah explained, "Underlying demand fundamentals remain strong. SCTY reported a record 395MW of bookings in Q2, up 67% sequentially and 82% YoY. SPWR’s pipeline has doubled from 2012 levels and currently stands at ~12GW+. Forecasted MW deployed are now projected to grow at a 30% CAGR through 2019. All factories are running at full utilization and SPWR expects demand to continue to grow into 2017. We continue to see upside to our ~55GW global demand forecast (which implies ~30% YoY growth), driven mostly by ongoing strength in the US (~70% YoY growth), China (~30% YoY growth), India (~2GW, 100% YoY growth) and other markets in Central/South America."

"Recent sell-off in the yieldco space creates a temporary set-back to some of the EM yieldco stories, but project economics in international markets are attractive enough to support the longer term growth requirements of this sector, in our view. While the yields are turning out to be higher than initial expectations, we do not see this being a big headwind for future growth and also expect yields to come down once markets start to normalize. We believe the cash on cash yields for projects in several global markets are in the mid teens percentage range and there is sufficient cushion built in for EM yieldcos to acquire projects and drop down accretively. Moreover, we expect pricing of fully developed projects available for sale to decline to levels where buyers are able to make the drop down economics. We also expect less competition from smaller yieldcos or companies looking to roll-up projects into a yieldco," added the analyst.

Shah added, "While several investors have expressed concern about TERP’s acquisition of VSLR’s portfolio, the US resi solar space is the most attractive segment in the entire solar market, in our view. We expect resi solar system costs to decline the most among all other solar application segments. Resi solar system costs are around $2.50-3.00/W and have the potential to decline by up to 40%. Commercial/utility segment costs on the other hand are already quite low and there is not much room for additional cost reduction. Moreover, the resi PPAs are among the most attractive part of the solar value chain. PPAs in the resi segment have on average ~2.5-3% annual escalators and much more attractive unit economics. Assuming the ITC steps down to 10% in 2017, we expect a greater proportion of customers moving to the leasing model vs. outright sales. We also expect very little impact on drop down economics from a yieldco stand point in 2017 timeframe. Finally, we expect leverage to start kicking in a more meaningful way from 2016."

For an analyst ratings summary and ratings history on SunEdison click here. For more ratings news on SunEdison click here.

Shares of SunEdison closed at $25.63 yesterday.

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