How to evaluate investment cases in the solar industry June 1

June 1st, 2011
How to evaluate investment cases in the solar industry
Solar energy seminar – University of Agder Campus
Yngve Walle
Direct: +47 22 87 87 18
Mobile: +47 91 78 65 44
Email: [email protected]
An independent full service investment bank
One of the largest
investment banks in
Norway by any measure
Focus on Norwegian
capital markets combined
with international
presence in key sectors
~235 employees located in
offices across Norway, as
well as in New York and
Singapore
Part of the Pareto Group
which also provides
services such as
shipbroking, project
financing and asset
management
Corporate Finance
& Advisory Services
Equity Capital
Markets
Debt Capital
Markets
Research
 Financing
 Equity sales & trading
 Debt sales & trading
 Equity research
 IPOs / listings
 Equity issuance
 Credit research
 Capital management
and strategy
 Listed and OTC
securities
 Bond and convertible
bond issuance
 Macro
 M&A and demergers
 Block-trades
 Public, private and
club deals
 Work-outs and
restructurings
 Acquisition of strategic
stakes
 Daily price run of ~150
securities
 Investment strategy
Asset & Contract
Brokerage
 Sale & purchase of
offshore rigs
 Sale & purchase of
shipping vessels
 Freight futures
 Commodities
 FX trading & advisory
 Debt advisory
 ~60 employees
 ~70 employees
 ~20 employees
 ~30 employees
 ~10 employees
 Norway
 Norway
 Norway
 Norway
 Norway
 New York
 New York
 New York
 Singapore
 Singapore
 Singapore
 Singapore
~45 employees providing back-office and support services
2
M&A – proven capabilities
Selected transactions within renewable energy
M&A – Hydro
power
M&A - Utility
M&A - Utility
M&A – Other
renewable
Sale of E-CO’s 30% stake
in EB Kraftproduksjon
Sale of 78% of Fjellkraft
Financial Advisor to ECO
Financial Advisor to
Fjellkraft
Acquisition of 100% of the
shares in Trondheim
Energi Nett
Sale of shares in company
Financial advisor to
TrønderEnergi AS
Financial advisor to 6
municipalities
Share sale
Sale of shares in Salten
Kraftsamband
Financial Advisor to one
of the owners
Financial Advisor to
Elkem
Sale of offshore
wind power business
by Havgul to Vestavind
Acquisition of UK based
Spectron Group
Financial Advisor
Financial Advisor
Sale of AS Tyssefaldene
and power contract (20
TWh)
Purchase of Kraftverkene i
Øvre Namsen
Purchase of 20% of E-CO
Vannkraft
Sale of 7 power plants
Financial Advisor to
Boliden
Financial Advisor to NTE
Financial Advisor to Oslo
kommune
Financial Advisor to
Orkla
Merger of HEAS, HrE and
LGE.
Merger with Hedemark
Energi (distr. and retail)
Sale of shares in the
company
Share sale
Sale of 49% of the
company
Financial advisor to
several municipal
owners
Financial advisor to
Gjøvik and Østre Toten
kommuner
Financial advisor to
several municipal
owners
Sale of shares in BKK
Financial Advisor to
several municipal
owners
Top-ranked
M&A advisor
within the hydro
power sector
Best-in-class
execution
within the utility
sector
Financial advisor to the
company
Share issue by industrial
partner
Sale of shares (49%)
Sale of shares in Lyse
Kraft
Financial Advisor to
Hadeland Energi
Financial Advisor to
Oppland Energi
Financial advisor to a
municipality
Merger with Hafslund
Sale of Hafslund’s fiber
network activities to EQT
Acquisition of Nena and
M3
Rental of power stations
(15 years)
Financial advisor to the
City of Oslo
Financial Advisor to
Hafslund
Financial advisor to
Imarex
Financial advisor to
Fauske kommune
In-depth
knowledge to
the utilities and
the renewable
structure in
Norway
Experience to
related
renewable and
industry sectors
3
Advisory services & private placements – trusted advisor
Selected transactions within renewable energy
Private
Placements /
Right issues
Valuations
Advisory
service
Private placements of
NOK 600m & NOK 400m
Underwritten share issue
of NOK 350m
Private placement of NOK
134m
Private placement of NOK
132m
Private placement of NOK
100m
Convertible bond issue of
EUR 31m
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Valuation of power
stations
Valuation and evaluation
of strategy
Valuation of NorSun
Financial Advisor to
Hafslund
Financial Advisor to EB
Financial Advisor
Fredrikstad Energi
Owner strategy
Financial Advisor to
Fredrikstad kommune
Valuation of wind power
assets in the Baltic
Valuation of power related
business
Valuation of the
company’s power stations
Financial Advisor to
Vardar
Financial Advisor to
Agder Energi
Financial Advisor
Ownership municipalities
Oslo Kommune
Evaluation of the capital
structure in Vardar
Financial Advisor to
Buskerud
Fylkeskommune
Ownerstrategy
Evaluation of sale / rental
of Tyssefaldene
Valuation and owner
strategy
Owner strategy –
Akershus Kraft
Financial Advisor
Financial Advisor
Financial Advisor to
BKK’s ownership
municipalities
Financial Advisor to
Akershus
Fylkeskommune
Unrivalled deal
flow and market
presence
Trusted advisor
within the
renewable
energy segment
In-depth
knowledge to
the utilities and
the renewable
structure in
Norway
June 2009
Other
Credit rating of energy
companies
Economical regulation of
market place for trading
with electricity for physical
delivery
Advisor to the Ministry of
Petroleum & Energy in
relation to Statnett’s
application for a future
share issue
Financial Advisor
Financial Advisor
Financial Advisor
Quality assurance in
connection with sale of
45% of Agder Energi
Financial Advisor to
owners
Advisor to the Norwegian
State Finance Fund in
relation to capital injection
into Norwegian banks
Joint Financial Advisor
Valuation of Svatisen &
Kobbelv
Trusted advisor
on high profile
assignments
Financial Advisor to TXU
Nordic Receivership
4
Innhold
1
Pareto
2
Macro trends – solar industry
3
Norwegian solar players
4
Focus points – investments
5
Market sentiment
6
Summary
5
Significant long-term growth potential – Substituting fossil fuels
Estimated growth in energy supply by source
 Fossil fuels represented 81% of the world energy
demand in 2008
Total primary energy demand WEO 2010 450 Scenario (Mtoe)
16,000
 Measures introduced to combat climate change and
meet security objectives should eventually lead to
more renewable demand:
 Renewable energy 2008:
13%
 Renewable energy 2035E: 27%
12,000
8,000
4,000
0
1980
Coal
2008
Oil
Gas
2020
Nuclear
2030
2035
Renewables
 Renewable energy demand expected to increase
significantly in all regions, with dramatic growth in
India and China
Renewable energy targets in European markets
Current and targeted renewable energy share, selected European markets
Many countries have renewable energy
targets:
60%
50%
40%
 EU: 20/20/20 target – reduction of greenhouse gas
emissions of at least 20% below 1990 levels with
20% renewable energy in 2020
 India: 20 GW electricity from the sun (2022) and
72.4GW installed renewable energy capacity
18%
15%
30%
13%
20%
31%
10%
23%
16%
12%
13%
10%
10%
7%
8%
7%
8%
7%
17%
13%
0%
Sweden Finland Denmark France EU-27
Additional renewable energy share (2020 target)
Spain Germany Italy
2%
UK
Current (2007) renewable energy share
Source: IEA, Eurostat, European Commission and Pareto Securities Research
6
Norwegian solar companies found in all parts of the value chain…
Selected examples – focus areas
Solar industry value chain
Silicon
Wafer
Cell
Module
System/
installation
Sell power
 [silicon]
7
…with an increasing number of companies
SilanSil
A significant industry cluster has been developed
8
The sector has seen significant investor interest
Funds
Private equity/
venture capital
Industrial
High net worth
individuals
Utilities
The sector has obtained interest from a diverse base of investors
9
REC’s share price fluctuates significantly
REC share price development
 REC’s share price fluctuates
significantly
NOK per share
35
Q4’09
Q1’10
Q2’10
Q3’10
Q4’10
Q1’11
30
Profit
warning
25
20
 Other events also have significant
impacts on the share price, for
instance
 Recent profit warning
15
10
Jan-10
 It is especially sensitive to earnings
releases and other guidance as
these indicate the direction of costs
levels and REC’s competitiveness
etc.
 German decision to shut
down nuclear capacity
Apr-10
Jul-10
Nov-10
Feb-11
May-11
Significant fluctuations in share price, based upon market and company news
10
Listed solar companies – price multiple development
EV/EBITDA
EV/EBITDA
 Valuation of solar companies is highly
volatile due to limited transparency and
the market’s high dependency on
political decisions, which often have
binary outcomes
10
9
8
7
 Bear in mind that analyst estimates
often lag market’s expectations, which
could explain the recent drop in
valuation
6
5
4
3
Jan-10
Apr-10
REC
Q-Cells
Jul-10
Suntech
Nov-10
Feb-11
May-11
Solarworld
11
Extreme operational leverage
REC 2012E EBITDA vs. % change in 2011-12E ASP’s*
Fair value NOK 0
NOK 6
NOK 14
8,000
NOK 21
NOK 28
NOK 35
NOK 42
Base case
 Manufacturers’ earnings are extremely
leveraged towards changes in selling
prices
6,000
 This is particularly true for downstream
players
4,000
 Price declines in oversupplied markets
will lead to an industry shakeout
7,191
6,178
5,188
 Cost position key going forward
4,218
2,000
3,237
2,169
1,128
0
-15%
-10%
-5%
0%
5%
10%
15%
EBITDA 2012E
* ASP = Average selling prices
Source: Pareto Securities Research
12
Many moving parts – Estimates should be regarded with scepticism
Demand estimates year end vs. start 2010
 Forecasters have been spectacularly wrong
in the past
Demand estimates pre-2010 vs. 2010 year-end
20,000
16,000
 Political risk is the largest issue when
assessing the solar industry
12,000
8,000
4,000
0
#16
#15
#14
#13
#12
#11
#10
#9
#8
#7
#6
#5
#4
#3
#2
2010E YE
#1
Demand
Average
Target prices for REC have a wide range
 Not only downside risk:
 Favourable tariff regimes offers may also
increase demand significantly. Examples
include:
‣ Czech Republic 2008 -2010
‣ Spain 2006 – 2008
‣ Italy 2007 – 2010
REC - Selected target prices
35
 Wide range for target prices from different
analysts following solar manufacturers
30
25
20
15
10
5
0
Broker #14
Broker #13
Broker #12
Broker #11
Broker #10
Broker #9
Broker #8
Broker #7
Broker #6
Pareto Sec.
Broker #4
Broker #3
Broker #2
Broker #1
Target prices
Average
Source: Pareto Securities Research
13
Political risk is a game changer – focus on tariff cuts continues
Tariff reductions 2010-2011
 Falling module prices combined with fixed
feed-in-tariffs led to extremely attractive
returns in 2009
 Boom in demand through 2010 made
government review their subsidy programs
Tariff cuts vs. system price and IRR in Germany
System price 60 kW rooftop Germany (EUR/w)
5.00
IRR
0.44
German FiT levels
EUR/kWh
0.41
4.50
25.0%
20.0%
0.37
4.00
15.0%
0.31
3.50
IRR
0.27
System price
3.00
 Degressions and extraordinary subsidy cuts
remain the focus in 2011
 Germany reduced subsidies by 13% in
January 2011
 Italy will implement subsidy cuts in three
phases
 Announced subsidy cuts will affect solar
parks’ profitability and lead to further price
reductions
10.0%
5.0%
2.50
2.00
0.0%
04/11/2008
17/06/2009
German solar tariff
27/01/2010
System price (EUR/w)
Source: Pareto Securities Research
08/09/2010
14/04/2011
IRR
14
But recent German decision to shut down nuclear capacity is positive
 Pareto analyst’s newsflash Monday 30. May:
 The German government has made an
irreversible decision to shut down all nuclear
capacity by 2022, according to Federal
Environment Minister Norbert Röttgen
 Germany currently have 17 nuclear power plants,
of which 7-8 were temporarily shut down after the
Fukushima disaster. The off-line plants will not be
restarted, while the reminder plants will be shut
down in 2021/2022
German electricity generation (2010)
22%
Nuclear
24%
Natural Gas
2%
Coal
 Nuclear power produced 22% of the electricity in
the country in 2010
 The decision has led to increased support for
renewable energy and Chancellor Angela Merkel
will present suggestions for new solar subsidies
shortly, which should be positive for demand
going forward
14%
Solar
38%
Other
renewable
energy
 While part of these news should already be
discounted in the share, it is nevertheless positive
for the sector
15
Typical investor preferences (I)
 Specific project – not a blind pool
 A competent ”execution team”
 Technical and financial competence
 Experience from similar ventures
 Pricing and structure
 Investors do not like high ”pre-money valuation. The founders get high return when (and if) the
investors get high return
 Control important for some, while some investors state that they shall not have controll
 Not too complex group structure
 A competent lead investor (co-investors) is a significant signal
 Technically and financially
 Share liquidity
 Many investors have limitations with regards to unlisted companies, typically a cap of 10% of the
portfolio. At present most investors have utilised this quota
 Larger companies rather than small
16
Typical investor preferences (II)
 Scalability…
 How large are the targeted segments?
 …but no unrealistic hockey-stick
 Visibility on revenues and earnings, for instance through contracts or LOIs
 Sound technological platform
 Tecnhical assessment often difficult within solar industry niches
‣ For instance limited visibility regarding competition and substitutes
 Total capital need
‣ Possibility for debt financing in addition to equity?
‣ Burn-rate indicate additional funding need at later stage
 Geography
 ”Why invest in Europe, when the industry moves to Asia?”
 Can the investor identify a clear exit strategy?
 Return on investment
 Investors require competitive return on investments; NPV and IRR
17
Closing remarks
Norway has developed a strong cluster within a booming industry
Competition is fierce
Perceived risk of industry is high
 Operational gearing, political risk, technological shifts
Investor sentiment on stock exchanges focused on larger companies
Private equity and venture capital more likely sources of funding for companies in earlier
stage
How to evaluate investment cases in the solar industry?
As in any other industry…a “green” profile is not enough
18
Thank you.
19
Pareto Securities contact details and disclaimer
Oslo (Norway)
Pareto Securities AS
Dronning Mauds gate 3
PO Box 1411 Vika
N-0115 Oslo
NORWAY
Stavanger (Norway)
Pareto Securities AS
Haakon VIIs gate 8
PO Box 163
N-4001 Stavanger
NORWAY
Bergen (Norway)
Pareto Securities AS
Olav Kyrres gate 22
PO Box 933
N-5808 Bergen
NORWAY
Kristiansand (Norway)
Pareto Securities AS
Vestre Strandgate 19A
N-4611 Kristiansand
NORWAY
Trondheim (Norway)
Pareto Securities AS
Nordre gate 11
PO Box 971 Sentrum
N-7410 Trondheim
NORWAY
Tel:
Fax:
Tel:
Fax:
Tel:
Fax:
Tel:
Fax:
Tel:
Fax:
+47 22 87 87 00
+47 22 87 87 10
+47 51 83 63 00
+47 51 83 63 51
+47 55 55 15 00
+47 55 55 15 50
+47 21 50 74 20
+47 21 50 74 99
New York (US)
Pareto Securities Inc
150 East 52nd Street, 29th Floor
New York NY 10022
USA
Singapore
Pareto Securities Asia Pte Ltd
16 Collyer Quay #27-02
Hitachi Tower
Singapore 049318
SINGAPORE
Pareto Offshore AS
Dronning Mauds gate 3
PO Box 1411 Vika
N-0115 Oslo
NORWAY
Pareto Shipbrokers AS
Dronning Mauds gate 3
PO Box 1411 Vika
N-0115 Oslo
NORWAY
Tel:
Fax:
Tel:
Fax:
Tel:
Fax:
Tel:
Fax:
+1 212 829-4200
+1 212 829-4201
+65 6408 9800
+65 6408 9819
+47 22 87 87 00
+47 22 87 87 10
+47 22 87 87 00
+47 22 87 87 10
+47 21 50 74 60
+47 21 50 74 61
Website:
www.pareto.no
Bloomberg: PASE (go)
Reuters:
PARETO
Disclaimer
These materials have been prepared by Pareto Securities AS and/or its affiliates (together “Pareto”) exclusively for the benefit and internal use of the client named on the cover in order to indicate, on a
preliminary basis, the feasibility of one or more potential transactions. The materials may not be used for any other purpose and may not be copied or disclosed, in whole or in part, to any third party
without the prior written consent of Pareto.
The materials contain information which has been sourced from third parties, without independent verification. The information reflects prevailing conditions and Pareto’s views as of the date of hereof,
and may be subject to corrections and change at any time without notice. Pareto does not intend to, and the delivery of these materials shall not create any implication that Pareto assumes any
obligation to, update or correct the materials.
Pareto, its directors and employees or clients may have or have had positions in securities or other financial instruments referred to herein, and may at any time make purchases/sales of such securities
or other financial instruments without notice. Pareto may have or have had or assume relationship(s) with or engagement(s) for or related to the relevant companies or matters referred to herein.
The materials are not intended to be and should not replace or be construed as legal, tax, accounting or investment advice or a recommendation. No investment, divestment or other financial decisions
or actions should be based solely on the material, and no representations or warranties are made as to the accuracy, correctness, reliability or completeness of the material or its contents. Neither
Pareto, nor any of its affiliates, directors and employees accept any liability relating to or resulting from the reliance upon or the use of all or parts of the materials.
20