Asset Monetization Scenario Could Boost SolarCity (SCTY) and Sunrun (RUN) - Morgan Stanley

In addition to news that the California Public Utilities Commission (CPUC) voted 3-2 to continue net metering in California, shares of SolarCity (NASDAQ: SCTY) and Sunrun (NYSE: RUN) are strong today after Morgan Stanley analyst Stephen Byrd did a deep dive on a hypothetical asset monetization scenario. This after SolarCity discussed monetizing some of its assets via investments from private equity / infrastructure investors.

Byrd said potential positive catalyst on the horizon: asset monetizations could prove the value of SCTY and RUN's assets and highlight just how little growth is priced into the stocks at current levels.

"While SCTY and RUN certainly do not need to monetize assets in order to finance their growth on our math, we believe that a sale of a portion of cash flows could signal to the market the true value of the solar assets the companies are installing and serve as a positive catalyst for the stocks," he said. "There has been much debate among investors regarding the appropriate discount rate and resulting value of SCTY and RUN's contracted solar assets. An asset monetization could cut through this debate by providing a concrete, tangible valuation marker that could then be applied to the rest of SCTY and RUN's portfolios, a data point that on our math is likely to be well above what is implied in the stocks. We also note that the companies would likely only sell the contracted portion of cash flows, allowing them to retain the customer relationship and potential upside from recontracting. SCTY discussed such a possibility during their recent analyst day, and we think that an announcement on this front could be made in the next few months."

The firm's math indicates that SCTY and RUN could hypothetically generate ~$3.9b and ~$1.1b of cash through 2018 if they monetized their existing assets and the entirety of our 2016-18 MW forecasts.

"While we expect any actual monetizations to be only a small portion of SCTY / RUN's MWs, we think a hypothetical evaluation of the company's entire portfolios is useful in analyzing what is priced into the stocks. We arrived at these figures by estimating the cash "gross margin" that SCTY / RUN could respectively generate on future MWs (Tax Equity Proceeds per Watt + Monetization
Proceeds per Watt - Fully-Loaded Costs per Watt), and applying this figure to our MW installation forecasts. We estimated the monetization proceeds using our rooftop solar project economics model (ask us for a copy), adjusting for each company's cost structure by year, assuming no debt is put on the new projects (potentially overly conservative), and using a 7% discount rate -
higher than SCTY's typical disclosure but in-line with the sensitivity provided in the company's analyst day slide deck. While it is possible that the cash flows could be sold / valued at lower discount rates, especially if sold to a tax-efficient investor, we believe 7% is an appropriate starting point, especially given that the recent SCTY ABS debt deal priced at a higher yield than expected. We arrive at ~$0.80 of "gross margin" per watt for SCTY in 2017, which is not far from the math laid out by SCTY on their analyst day (~$1.46/watt proceeds from tax equity + ~$1.48 proceeds from asset monetization + $0.10 of rebates - $2.25 in fully-loaded product costs). Using our projected 2017 sales volume of ~1.6 GW, this would yield margin to shareholders of ~$1.3b for contracts entered into in 2017 alone. We also ascribed value to each company's existing portfolio assuming no recontracting and that taxes would have to be paid eventually if this strategy were employed (or alternatively SCTY / RUN would simply not have to use tax equity providers)."

The firm maintained an Overweight rating and price target of $104 on SCTY. Meanwhile the firm has an Overweight rating and $28 price target on RUN.

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

Shares of SolarCity closed at $32.84 yesterday.

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