• SUNPOWER GROUP LTD. (SGX:5GD)’s 32% share price correction since its substantial shareholders fell prey to unauthorised share transfers on 17 Oct 18 appears to be overdone. Total exposure is limited to only 3.8% of issued shares; downside is limited as legal actions have been taken against their borrower and Sunpower has started buying back shares in 2019.
• Core business remains robust and current valuation is attractive at 5.8x 2018F PE.
• Maintain BUY and SOTP-based target price of S$0.76.

What’s New

Concerns overblown on unauthorised share transfers, downside is limited.

• Sunpower’s share price underwent a series of sharp corrections since 22 Oct 18, shortly after two of its substantial shareholders, Mr Guo and Mr Ma, entered into a loan agreement with America 2030 Capital Limited on 17 Oct 18, by pledging a total 28m collateral shares. On 3 Nov 18, both shareholders discovered that their collateral shares were no longer in the designated account, although the loan has not been disbursed.
• We believe the concerns were overblown as the total exposure for this event is only 28m shares or 3.8% of the total issued shares and represents only a small portion of the total shareholding of both Mr Guo and Mr Ming, which stood at 37.4% before the pledge.
• In the worst-case scenario, no more shares should be sold on the market even if the shareholders lose their case, as proceeds from shares sold in Oct 18 should cover the breakup fee. We estimate proceeds to be S$4.9m, assuming half of the 28m shares have been sold at an average price of S$0.35.

Swift legal actions have been taken to limit downside risk.

• In response to the event, both substantial shareholders have taken swift actions including:
  1. commenced legal proceedings in the Supreme Court of Singapore to seek the return of the collateral shares,
  2. obtained a court order on 8 Nov 18 for interim injunction to restrain America 2030,
  3. responded to a SGX query on 20 Nov 18 that it has not breached any listing rules and loan covenants, and
  4. voluntarily lodged a report with the Commercial Affairs Department.

Core businesses remain robust, expect a seasonally strong 4Q18.

• Sunpower reported a robust set of 3Q18 results. Revenue and net profit grew 87.5% and 276.7% y-o-y, respectively. Management continues to focus on green investment (GI) projects to take advantage of the vast business opportunities in China’s anti-smog sector.
• 2018 net profit is expected to be boosted significantly by:
  1. continued ramp-up of GI projects started in late-17,
  2. the newly acquired Yongxin plant in 3Q18, and
  3. seasonally higher deliveries of manufacturing and services (M&S) projects in 4Q18 to meet year-end project deadlines.

Stock Impact

Expect a seasonally stronger 4Q18 and new GI projects to drive record.

• Sunpower’s results typically experience seasonality where heat and steam usage in existing GI projects tend to pick up in tandem with economic activities and falling temperatures in winter. In addition, M&S projects typically enjoy higher deliveries in 4Q18 as clients need to meet their year-end project deadlines.

Share buyback provides support and indicates that share price is undervalued.

• Sunpower started its first share buyback on 2 Jan 19 and has continued to buy actively every day. So far, it has bought back over 1m shares at S$0.30-0.33 per share. We believe this could provide a good support for the share price and sends a positive signal that the share price is undervalued.

Recent conversion of share options could minimise capital gain tax from low share price.

• Sunpower’s employees converted 26.3m shares at an exercise price of S$0.116 per share, from their employee share options scheme granted in 2015. We note that the conversion at lower share price could reduce the capital gains tax of the employees, calculated based on the difference between share price at the point of conversion and exercise price.

Earnings Revision / Risk

• No changes to our earnings forecasts.
• Risks include:
  1. higher leverage from expansion,
  2. project execution risk, and
  3. forex.

Valuation / Recommendation

• Maintain BUY and SOTP-based target price of S$0.76.

Share Price Catalyst

• Faster-than-expected ramp-up of GI projects.
• Higher-than-expected project wins for M&S segment.
• More EPS-accretive acquisitions.

Source: UOB Kay Hian Research - 10 Jan 2019