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Sunnova Energy IPO: Smart Business Model

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Sunnova Energy (NOVA) uses a network of independent dealers to install the company’s solar energy systems. Also, clients don’t need to make any initial up-front payment to benefit from the company’s services. Thanks to this business model, Sunnova Energy International is growing the number of customers at double-digit growth. Besides, the company reports revenue growth and positive EBITDA. With that, investors will need to study the amount of debt and the free cash flow generation carefully in the future. Those are the only weak points on this name.



Source: Prospectus



Source: Prospectus

Business And Market Opportunity

Sunnova Energy International offers residential solar and energy storage systems to more than 63,000 customers in the United States.



Source: Company’s Website

The company’s business model is different from that of other operators. Sunnova Energy collaborates with local dealers, who are in charge of designing and installing the energy storage systems. With this business rationale, the company obtains more flexibility and lower fixed costs as compared to peers.

The services provided by Sunnova Energy International are very convenient for clients. Customers don’t need to make any up-front payment. Instead, they sign a long-term agreement with Sunnova Energy, which obtains predictable and stable cash flows.

See below a list of the company’s services:

  • Operations and maintenance.

  • Constant monitoring.

  • Replacements and equipment upgradation.

  • Supply and demand analysis and optimization.

The key performance indicators show that clients appreciate Sunnova Energy’s services. The weighted average number of customers increased to 53,400 showing an increase of 37%. It is very beneficial. However, the estimated gross customer value per customer and the estimated net system value increased in 2018, which is worrying. More customers don’t seem to drive the costs per customer down. The table below offers further details on the matter:

Source: Prospectus

Wood Mackenzie Power & Renewables believes that the number of residential solar energy systems in the U.S. will increase from 2.2 million in 2018 to 5.4 million in 2024. It means that the market will grow at a CAGR of 16%.



Source: Prospectus

Strong Revenue Growth, But No FCF Generation

On December 31, 2018, Sunnova’s revenue increased by 35% amounting to $104 million. However, operating losses increased from -$10 million to -$13.7 million. Sunnova Energy also reported operating losses for the year ended March 31, 2019 as well as for the year ended December 31, 2017. Sunnova Energy notes that increased expenses to fund the company’s growth are responsible for the losses. The company expects to continue reporting losses in the future and does not know whether revenue will increase enough to absorb costs. The top of the P&L is given in the image below:

Source: Prospectus

Sunnova Energy International does not report positive CFO or positive FCF. As shown in the image below, FCF was equal to -$289 million and -$264 million in 2017 and 2018 respectively.

Source: Prospectus

The fact that CFO is not positive is worrying. The amount of financial expenses and equity-based compensation plans appear to be too large. It means that, right now, debt holders seem to be making money on this name. Shareholders may need to wait a few years until the CFO is profitable.

With that, Adjusted EBITDA is positive and grew in 2018 by 75% amounting to $41 million. It is very beneficial. However, in the future, shareholders should review the CFO and the FCF. They are more relevant financial stats as they include interest expenses. The image below offers both EBITDA and cash flow figures:

Source: Prospectus

Balance Sheet

As of March 31, 2019, Sunnova Energy International reports an asset/liability ratio of 1.47x and $43 million in cash. The most significant asset is property and equipment, which is worth $1.399 billion.

Among the different properties of Sunnova, solar energy systems approximate to $1.373 million. Solar energy systems are fixed assets, which may be challenging to sell. With that, according to the prospectus, these systems have a useful life of more than 35 years. It means that Sunnova Energy may be able to generate electricity for a long time. See below for more on the company’s properties:



Source: Prospectus

The image below offers a list of assets:

Source: Prospectus

Sunnova Energy’s financial situation is stable. However, market participants should note the company’s debt obligations of more than $1.2 billion. Sunnova Energy may have to pay more than $458 million in 2019, 2020, and 2021. With negative FCF, if Sunnova Energy does not raise a sufficient amount of money in the IPO, the company may have to raise new capital in the future. As a result, the share price could decline.

See below for more on the company’s contractual obligations:

Source: Prospectus

Notice that more than 84% of the total amount of liabilities is represented by debt. Besides, affiliates decided to give debt to the company, which is not a great news for shareholders. Some of the affiliates receive a fee for managing and offering services to the company. Read the lines below for more details on the matter:

In connection with these warehouse credit facilities, certain of our affiliates receive a fee for managing and servicing the solar energy systems pursuant to management and servicing agreements.

Source: Prospectus

The image below offers a list of liabilities:



Source: Prospectus

Conversion of Preferred Stock

Sunnova Energy sold convertible preferred stock to finance its operations, which may not be appreciated by IPO investors. With this in mind, it is worth mentioning that the company expects to convert these securities as the IPO goes live. The table and the lines below offer further information on the matter:

Source: Prospectus



Source: Prospectus

Besides, before the IPO, the company had a dual-class structure, which the market usually dislikes. Notice that after the IPO, Sunnova Energy will convert both class A and B shares. The company will only have one type of common stock. The lines below offer further information on the company’s equity structure:



Source: Prospectus

Use Of Proceeds

Sunnova Energy expects to use the proceeds for general corporate purposes. It also expects to use the proceeds to repay a part of its debt, which market participants will most likely dislike. The lines below offer further information on the matter:

We intend to use the net proceeds to us from this offering, including upon exercise of the underwriters’ option to purchase additional shares, for general corporate purposes, including working capital, operating expenses, capital expenditures and repayment of indebtedness.

Source: Prospectus

Valuation

Sunnova Energy competes with electric utilities, retail electric providers, and independent power producers. Besides, vertically integrated solar operators such as Vivint Solar, Inc. (VSLR) and Sunrun Inc. (RUN) are also competitors. Vivint Solar and Sunrun trade at 5x-6.3x forward revenue and report revenue growth of 8%-42%.



Source: Ycharts



Source: Ycharts

Sunnova Energy’s debt is equal to $1.241 billion. With a debt of $43 million, net debt approximates to $1.198 billion.‬ Sunnova Energy reports EBITDA of $41 million, so the company’s Debt/EBITDA ratio is 29x. The most significant Debt/EBITDA ratio reported by peers is equal to 45x. With this in mind, Sunnova Energy does not have much leverage compared with competitors. Market participants can compare the company with Vivint Solar and Sunrun. See below for more on the leverage of peers:



Source: Ycharts

Sunnova’s revenue approximates to $104 million. With revenue growth of 35%, forward sales of $140 million are conservative. If we multiply 6.3x forward sales by $140 million, we get a total enterprise value of $882 million. It is a small valuation. Sunnova Energy reports positive EBITDA, so using the EV/EBITDA ratio is more appropriate on this name.

As shown in the image below, Sunrun trades at 85x TTM EBITDA. With EBITDA of $41 million and a ratio of 85x, Sunnova Energy would have an enterprise value of $3.485 billion, which is too large.



Source: Ycharts

As shown in the image below, Sunnova Energy has fewer employees and assets than Sunrun and Vivint Solar. With this in mind, Sunnova Energy’s enterprise value should be lower. Vivint Solar has an enterprise value of $2.29 billion, and RUN has an enterprise value of $4.75 billion. Sunnova Energy will most likely have an enterprise value between $1.3 billion and $1.5 billion. The buying opportunity will most likely start at an enterprise value of $882 million.



Source: Ycharts



Source: Ycharts

Conclusion

It is very positive that Sunnova Energy reports revenue growth and positive EBITDA. However, without FCF generation and with a large amount of debt, market participants will need to follow the amount of cash in hand closely. Bear in mind that Sunnova Energy will need to make debt payments in the future. If the company does not have some money in hand, it may sell additional equity, which may lead to share price depreciation.

Public competitors have a larger size than Sunnova Energy, which makes assessing the company’s enterprise value difficult. Taking into consideration the total amount of assets of peers, Sunnova Energy’s enterprise value will most likely approximate to $1.3 billion and $1.5 billion. With that, the buying opportunity will be at enterprise value of $882 million or 6.3x forward sales.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Initial Public Offering & Preferred Stock News


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