In a Feb. 22 research note, analyst Devin Schilling reported that PI Financial initiated coverage on UGE International Ltd. (UGE:TSX.V; UGEIF:OTCQB) with a Buy rating and a CA$5.25 per share 12-month price target. Today, UGE's share price is about CA$2.75.
"With a turnaround largely complete and a strategic shift entering into the owner/operator business model behind them, we believe UGE is well positioned to benefit from the rapidly growing solar market," Schilling wrote. The company specializes in commercial and community solar energy projects.
The analyst presented the main reasons PI Financial is bullish on the UGE investment opportunity.
First, the U.S.' solar industry is "growing at a rapid pace" due to favorable government policies and related tax incentives, decreasing costs (they are now 70% lower than in 2010) and rising demand for clean electricity, Schilling highlighted. In the last decade, the industry grew an average of 49% each year.
Two, the U.S.' community solar market is also expected to grow, Schilling wrote, by about 130% over the next five years.
"With governments around the globe implementing stronger environmental policies designed to fight climate change in addition to corporations and individuals facing pressure to meet sustainability targets, we believe UGE is well positioned to benefit from continued expansion of the solar industry over the foreseeable future," Schilling commented.
Three, UGE shifted its business model from working for other solar operators to building, owning and running its own solar projects, Schilling pointed out, which affords it further upside. The owning and operating elements should provide UGE with a steady, recurring revenue stream and afford it much higher margins.
"A growing recurring revenue stream could result in a rerating for UGE and provides additional
upside to our target price," Schilling noted.
Four, UGE's expanding project backlog, last valued at US$112 million on Sept. 30, 2020, forecasts future revenue, in two forms. About US$12.7 million of upfront revenue is anticipated as the company installs projects over the next two years, and roughly US$10.7 million of annual recurring revenue is forecasted over the 20-plus-year life of UGE's projects.
Schilling also noted that UGE is currently trading at an unwarranted discount to its peers but expects the gap to shrink, in part, as more and more investors learn about the company.
"We anticipate the pace of contract announcements will further ramp up with the Biden Administration having announced plans to adopt a strong clean energy and climate agenda which calls for US$2 trillion in spending over the four-year term," Schilling added.
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