ReneSola sells for less than liquidation value (NYSE:SOL)
I talked about it ReneSola (SOL), one of the leading builders of solar farms internationally, as a great turnaround idea last October here, priced around $7. Well, the company continues to make money and grow the underlying business, despite less respect from investors, with the price below $5 yesterday.
Investors have sold every solar name with the tech bust since November. Ongoing and new tax incentives for solar projects within the Building back better The Democrats’ plan collapsed in the Senate in December. And states like California are talking about ending many tax breaks for solar power. None of this is good news for ReneSola shareholders.
But here’s the illuminating long-term story. With fossil fuels like crude oil selling at 7-year highs in January, the profit motive to build large-scale solar power plants is becoming increasingly undeniable, without any financial assistance from governments. Today, most large solar farm projects can generate a long-term electricity supply at LOWER costs than natural gas, coal, and other less environmentally friendly sources. For the industry, this has been a technological ramp of greater economies of scale reducing costs, new inventions and designs capturing sunlight more efficiently, and advances in manufacturing processes producing more durable panels and modules. In the future, new peaks in oil, gas and coal will do all the work to encourage solar development at even faster rates, sooner rather than later. Essentially, free market forces are about to take over, encouraging the construction of solar farms at much higher growth rates than they are today. So ReneSola’s assets, technical expertise and experience could be swamped with projects in a year or two, especially if the company is serious about slowing pollution from global warming.
You would think that investors and analysts on Wall Street have understood the truly positive future of ReneSola and are now placing a higher valuation on the company today. You would be wrong. Currently, you can purchase the wonderful operational future of SOL for basically… NOTHING! You heard me right. Instead of paying outrageous overvaluations for Big Tech with growth rates starting to fail (watch Meta-Facebook (FB) or PayPal (PYPL) for example), why not add a high-growth business future to your portfolio for next to nothing upfront?
How can I say such a thing with a stock quote of around $5 per share? When the stock soared in early 2021 on excitement over the Democrats’ takeover of both houses of Congress and the presidency, new solar incentives seemed like a smart bet to tackle climate change. . Wall Street went wild for solar names. ReneSola went from $2 per share in September 2020 to $35 in January 2021. Fortunately, management was paying attention, smartly deciding to issue new shares on the open market for cash, as a low-risk avenue and at low cost to fund future business growth. . The stock offerings were sold at $16 and $25 about a year ago. This effort has actually dramatically increased the underlying asset value of the shares for existing shareholders holding before 2021 (instead of diluting them like most issuance programs) with cash holdings rising from less than $0.50 to $4 per share and a book value of $2.50 to $6.
The new capital has paid off the debt and the rest is mostly on the balance sheet. At the end of the third quarter of September (the last period reported), ReneSola held $275 million in cash and short-term investments, and $351 million in current assets compared to only $36 million in current liabilities. . The remaining $315 million in working capital is largely unnecessary surplus should an owner buy out the business. Here’s the kicker: The company’s total outstanding shares multiplied by $5 in price creates a notional private equity capitalization of $349 million, roughly equal to working capital.
The company also has $157 million of other long-lasting assets, such as depreciated net plant and equipment, compared to only $51 million of long-term liabilities, almost entirely property lease obligations. Again, the current total value of stock market ownership of $349 million is measured against a tangible net book value (mostly cash) of $421 million. The price to tangible book value of 0.83 is shown below and is close to the same ratio as in mid-2020, when the market quote was hovering below $2. However, the current balance sheet is teeming with cash, more so than at any time in recent memory. From my perspective, Wall Street places no real value on future business growth, despite forecasting decent improvements in underlying business in 2022-23.
Surprisingly, when you subtract cash from total equity and debt capitalization, enterprise value of $135 million today is very close to the same setup as in mid-2020, when few Investors wanted to have anything to do with solar right after the COVID-19 pandemic shutdowns. Believe it or not, that minor sum compares to an enterprise value of over $2 billion in January 2021.
Another point to ponder, EV to EBITDA and revenue ratios are back near 5-year lows for ReneSola, and a discount to other solar names.
To illustrate how sharp ReneSola managers have become, in December they decided to buy back shares on the open market with their cash pile would be a great idea, and I agree. Selling shares at the high price of $25 a year ago and buying them back today for $5 is borderline brilliant for existing stakeholders. In fact, if they used the entire $50 million buyout amount approved by the board to buy stock at $5, the tangible book value and liquidation readings would drop from $6.00 to $6.20 per share (on the reduced number of shares outstanding), all other things being equal.
If business sales grow +30% annually between 2023 and 2024, after the Wall Street analyst predicted a +55% increase in 2022 from last year, who wouldn’t want to own this builder? solar farm for a low initial cost? Additionally, projected EPS of $0.34 this year compares quite favorably to a cash-adjusted enterprise value of $1.92 per share. Can you find another strongly positioned solar company with a super conservative balance sheet, selling less than 6x EV to EPS? I can not.
What could go wrong? Management could grow too quickly, affecting cash flow and earnings. This is my biggest operational fear. However, ReneSola’s operational decisions have been ultra-conservative, and the beneficial evolution of the number of shares and cash in 2021 is just one example. Another risk is that the whole solar industry stops growing and no one wants to build a big solar power plant with cheap green power generation. Of course, that would mean everyone on planet Earth giving up on pollution and climate change goals.
Overall, I’m not very concerned about mining activity as currently configured. A final risk, which played out in January, is that stock markets around the world fall sharply, leading to further selling for ReneSola and all stocks. The overvaluation bubble in Big Tech stocks deflated and selling spread to solar names as a side effect. This trend may continue for a bit longer, but can only bring a better deal to new buyers of SOL shares.
The downside risk seems quite limited from $5. Assuming the entire $50 million share buyback is spent and its plant and equipment is worth 50 cents on the dollar held on its books, ReneSola still holds an asset liquidation value of at least 4, $00 per share.
I model the potential worst-case downside to $4 versus upside targets of $10+ in 12-18 months. Clearly, the risk/reward equation is asymmetrically tilted in favor of ownership. Today, it’s incredibly hard to find a similar growth story selling for next to nothing, net of massive cash. For those looking for exposure to the solar industry or a potential multi-bag, multi-year winner with very limited risk in portfolio building, ReneSola should be at the top of your search list.
Absolutely, a takeover of the current bargain price is an outcome for ReneSola to consider. A variety of potential suitors, from management to private equity, other solar infrastructure builders to any billionaire wanting exposure to the high growth rates to come in clean energy, could be considering a acquisition agreement with the almost gratuitous valuation of the company, after subtracting the useless cash position.
I own a small stake and could add to my position if prices drop below $5 in the next few weeks.
Thanks for reading. Please consider this article as a first step in your due diligence process. It is recommended to consult a registered and experienced investment adviser before carrying out any transaction.