Sunnier days ahead for UGE International, says iA Capital

A lower risk profile and strong return potential are positive attributes of UGE International (UGE International Stock Quote, Chart, News, Analysts TSXV:UGE), according to analyst Naji Baydoun of iA Capital Markets. Baydoun initiated coverage of UGE on Wednesday with a “Speculative Buy” rating and target price of $3.25/share for an implied return of 121.1 per cent at the time of publication.

Founded in 2008 and headquartered in New York City, UGE International provides commercial and community solar energy solutions to commercial and industrial clients in Canada, the United States and the Philippines. The company also develops, builds, owns, operates, deploys and finances solar projects, as well as offering engineering and consulting services.

UGE International is in the middle of a strategic pivot towards a more traditional independent power producer (IPP) model, with Baydoun believing the company could offer a lower-risk investment profile with more predictable growth.

“UGE offers investors improving growth and cash flow fundamentals driven by its strategic pivot towards contracted project development, exposure to the high-growth community solar market in the US (about 20 to 30 per cent CAGR through 2030), attractive risk-adjusted project returns (double-digit equity IRRs), and a discounted valuation compared with peers,” Baydoun said.

In assessing the sector as a whole, Baydoun believes growth in renewable energy will continue to accelerate , with a number of factors potentially driving annual growth of about 20 per cent through 2035 and more than 10 per cent through 2050 for solar energy in the United States, with community solar numbers potentially being higher.

The most recent full quarterly results came in November, headlined by energy production revenue growth of 37 per cent from the prior quarter as a result of the company’s fourth US project having a full quarter of operation.

“In the third quarter, we witnessed continued growth and improvements in our business,” said UGE International CEO Nick Blitterswyk in the company’s November 23 press release. “We signed an off-take agreement with Bloomberg and followed that with another agreement with T-Mobile post quarter-end. As 2021 comes to a close, we continue to scale our business in this fast growing market and look forward to continuing to execute on our business plan in 2022.”

UGE International released updates for its ongoing fourth financial quarter of 2021 on Tuesday, noting a number of significant milestones along the way.

Of particular note, the company increased its backlog by 41.9MW to over 158MW as of December 31, roughly a 36 per cent increase over the 116MW the company had as of September 30 and a near tripling of the 58.9MW the company reported at the end of 2020.

UGE’s growth was buoyed by projects being added across the company’s target markets, including recent market entries in Virginia and Massachusetts, where UGE has initial commitments in excess of 100MW, along with additional storage and standalone battery projects.

The company also had all three of its community solar project proposals in New Jersey selected for development to add another 2.2MW to the pipeline, with the aim of serving low-to-moderate income communities, and helping to expand access to cleaner, cheaper electricity.

All told, the company’s pipeline stood at over 1GW as of December 31, a 26.7 per cent sequential jump from September 30 and nearly tenfold growth on the 112.8MW the company reported at the end of 2020. Meanwhile, the company’s engineering division consulted on 20 active projects for seven clients in the quarter.

According to Baydoun, the company is aiming to have 100MW of operating assets by the end of 2024 compared to its present 1.5MW, with plans to have 100MW/year of new development thereafter, entirely driven by organic project development initiatives as the company ramps up its project deployment.

Baydoun expects the company’s financial picture to clear up over the next few years, projecting 2021 revenue to come in around $2 million for year-over-year growth of 42.9 per cent. From there, he projects 2022 revenue at approximately $2.6 million for a year-over-year increase of 30 per cent before experiencing a surge to a projected $8.4 million in 2023, an implied 223 per cent year-over-year increase.

Meanwhile, Baydoun projects the company’s EBITDA will turn positive in 2023 at $1.6 million for an implied margin of 19 per cent, following the reported $2.4 million loss in 2020, and the projected losses of $3.9 million and $3.1 million in 2021 and 2022, respectively.

“As UGE continues to successfully scale up its business and operations, we expect the company to be able to source lower cost capital over time (both from lower cost debt and equity capital funding levers),” Baydoun said. “As UGE improves and lowers its cost of capital, the company should be able to support a faster ramp-up of project development, gaining both scale and growth velocity.”

UGE International’s stock price has fallen by 26.5 per cent over the past 12 months, surging to a 52-week high of $3.19/share on January 25 before dropping to a 52-week low of $1.19/share on June 8. More recently, the stock has jumped in value by 21.1 per cent since Tuesday.