Clean Energy Part 2; What about Solar Energy?

Continuing with Clean Energy

Following our first article on drones and the deployment of investment funds into the clean energy sector, in this second piece we are focusing on US based solar energy.

The early adoption of solar energy, as delivered by photovoltaic (“PV”) cells was constrained by the high cost of the technology which inhibited mass market adoption. Still the technology worked fine and is used by corporates and in space. The International Space Station is an example of reliable PV technology in remote locations.

In recent years the cost of manufacturing, building and installing PV applications has declined – due to increased PV factory capacity. The penetration of solar applications in the US since 2010 has been growing from a low base. As the bar chart below shows there were 6,201 new installations of PV cells (a compound growth rate of 76% since 2006) the rapid growth was by residential and utility (power co) customers.

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US electricity is a $2trn annual market with solar energy < 1% of energy supplied. Solar is obviously more relevant to the “Sunbelt” States than in Alaska hence is not applicable to all states. But solar growth could see market share rise to 3.5% of energy generation by 2022. This is due to government encouragement and its clean energy initiatives.

In 2016 the United States Congress granted an Investment Tax Credit (ITC) Extension that covers solar power. The ITC is a 30% tax credit for solar systems on residential and commercial in place until December 31 2016 that allows 30% of the cost of the solar investment to be recouped against Federal taxation. If the solar industry succeeds in its lobbying efforts for a 5 year extension (from 2017 to 2022) then based on current growth rates it would offset 100m MT of Co2 emissions pa and power 19m homes.

First Solar Inc (Nasdaq:FSLR)….. BUY

First Solar Inc sells solar capacity to utility companies in the US, Europe, India, Australia and the Middle East. It operates many of the world’s largest grid connected PV power plants with 10GW (giga watts) of solar capacity installed worldwide. A notable deal, in February 2015 Apple Corp agreed to supply 100% of its US operations with renewable energy via an $848m, 25 year power purchase agreement from First Solar’s 280 MW California Flats solar plant (due for completion in 2016) – the largest solar power supply contract from a commercial end user.

In 2015 annual demand growth was c.1.7GW of power. New orders provide First Solar with opportunities to increase its installed capacity by c.20% pa. First Solar ended Q3 2015 with record bookings for 3.1GW – hence a requirement to build solar power projects.

First Solar is more exposed to American / global utility customers/ commercial clients than to residential PV applications. It does provide “Community Solar” where client utility companies provide their customers the option to buy solar power without them having to install panels on their houses. The main business is the sale of solar panels/ power to energy companies under long term supply agreements.

At its Q3 results, First Solar revised upwards its profit forecast for 2015. It expects 2015 results to show $3.55bn sales with operating income of between $450m-$490m (equating to EPS in the range $4.30-$4.50). The board said it expects net cash (cash + liquid securities less debt) to be around $1.35bn by end 2015. At the Q3 (Sept 30th 2015) First Solar had net assets of $5.42bn.

On 9th December, First Solar provided 2016 guidance, expecting sales to rise to c.$4bn with EPS of $4 – $4.50 but cash levels to reach $2.15bn. The cashflow boost is partly attributable to First Solar’s increasing use of joint venture partners who fund the upfront build costs in return for a share in the solar property. Under this financing structure the partner funds the entire build out in exchange for a 49% stake in the solar power plant and a share of the revenues for a 20 year period. Goldman forecast China, Japan and the US twill remain the top growth markets but also expected a pickup in emerging markets.

The improved 2015 results, outlook and cash generation has been well received. Goldman Sachs on 5th January published a report that upgraded their First Solar price target to $100 per share from $61 citing its ability to expand in the US and abroad.


Company First Solar
 Share Price ($) 64.14
Target Price ($) 90.00
52 Wk Hi/Low ($) 72.12/40.25
Shares O/S 100.92m
Market Capitalisation $6.47bn
Avg Daily Volume 3m
Dividend Yield 0%

Key Catalysts

First Solar could see upwards pressure on input costs, such as wafer, cell, polysilicon, module prices after softness in these costs over 2015.

One factor is slowing Chinese demand (where total solar installations are estimated at 15-16GW) – growth has stalled due to land issues.

Valuations in the solar sector have moved up and could correct if US equity market conditions deteriorate.

Key Risks to Price Target

i) Should the US withdraw the Solar Investment Tax Credit post 2016 then US demand growth for PV applications would be lower.

ii) First Solar requires significant desert acreage for its solar park properties hence most projects are located in Georgia, California, Texas and Nevada.

iii) First Solar is a US dollar denominated company listed on Nasdaq and hence is subject to exchange rate risk. It may be subject to different commission rates and holding charges.

Download the PDF report to read offline by clicking here

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