Sunnova Energy Gets a Sunnier Outlook From Wall Street

Sunnova Energy International Inc. (NASDAQ: NOVA) has managed to defy the market sell-off this week, after the company’s earnings report and guidance have given more confidence in its growth opportunities ahead. The Houston-based company offers operations, maintenance upgrades and other services with a fleet of residential solar energy systems. With just a $1.5 billion market cap, some analysts now see its opportunities becoming much larger than what was expected prior to its earnings report.

So far two analysts have raised their Sunnova targets handily, and each cited the low-cost of borrowing from a recent closing of a $412.5 million asset-backed securitization (ABS) coming in at some of the strongest terms the industry. While the solar aspect of the operations is of interest for those who are interested in combatting climate change, the big upside here looks to be that the company also will be able to use batteries and storage to help drive further growth.

As for the Sunnova fourth-quarter earnings results released on Monday, the company reported a net loss of $0.21 per share and $33.6 million in revenue. That compares to a net loss of $6.14 per share and $25.2 million in revenue in the same period a year earlier. The company increased its guidance on a few metrics. Sunnova expects to see customer additions in the range of 28,000 to 30,000, an increase from the previous 23,000 to 27,500 range. Its adjusted EBITDA is expected to come in between $58 million and $62 million, up from a prior $55 million to $60 million range. It also sees customer principal payments from solar loans of $32 million to $36 million, versus a prior target of $30 million to $35 million.

Credit Suisse reiterated its Outperform rating but raised its target price to $21 from $14. The firm talked up Sunnova’s ramping sales and noted that batteries are coming while capital costs are declining. The firm now sees its solar customer growth rising 19% per year (up from 16%) from 2019 through 2025.

The Credit Suisse report noted that its assumptions are still conservative as the latest ABS sale suggested project level cost of capital at less than 4.5%, and the model does not even include any value upside from Sunnova’s ability to upsell roofing financing, grid services and other products and services. Michael Weinstein said in the call, “Despite company guidance for 58% customer growth in 2020 and greater than 30% in 2021, we conservatively model a decline over the five year period that results in a more normalized 19% CAGR…”

Merrill Lynch reiterated its Buy rating as well and raised its price objective to $24 from $21. The firm raised 2020 growth targets and sees confidence in the outlook ahead, while also seeing a cash inflection into 2021.

The Merrill Lynch note showed that the target hike was primarily driven by the meaningful increase in its 2020 deployments and subsequent growth value that will compound through 2024 off of a higher base. The firm also noted that Sunnova has increasingly attractive debt terms seen in the latest residential solar ABS transactions. The firm further sees an attractive valuation with a rerating of discount rates. The investment rationale in the note from Julien Dumoulin-Smith said:

We are Buy rated on shares seeing market prices reflecting significantly limited downside to our PowerCo with minimal credit for future DevCo value at all. We see a variety of further upside levers to our valuation, including the debate around renewal value, which we conservatively provide only 20% for in our valuation.

There has been no updated call from Ladenburg Thalmann as of yet, but that firm just started coverage with a Buy rating and a $15 target price back in mid-January. The rest of the analysts who initiated coverage last August were all positive on the stock and the range of analyst target prices was $13 to $18.

As a reminder, Sunnova’s IPO from last summer came at $12 per share and was handily short of the $16 to $18 initial range expected. This was also the first major U.S.-based solar company to go public since 2015.

When Sunnova reported earnings earlier in the week, the company’s guidance was referenced positively. CEO William J. Berger said in the release:

With higher than expected growth in late 2019, which has continued into the new year, our outlook continues to improve, supporting an increase in our 2020 guidance. We now foresee our asset base growing at a higher rate than projected in the third quarter of 2019 while we maintain our focus on maximizing recurring cash flows from operations. In addition to overall customer growth, we have also seen our Sunnova SunSafe solar + storage sales and attachment rates increase at a faster pace than expected as consumers seek out more resilient sources of energy to combat severe weather events and unreliable electricity grids. Solar + storage has become an integral component of our business strategy and Sunnova SunSafe is now available in 16 markets. The increased pace of solar + storage sales is contributing to our growth and our customers’ ability to power energy independence.

Sunnova stock closed up 2.2% at $17.94 on Tuesday, with a $17.43 consensus target price. Its shares traded down fractionally at $17.85 on Wednesday, and its post-IPO trading range has been $8.01 to $19.76.

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