In an April 6 research note, analyst Sean Keaney reported that Eight Capital initiated coverage on UGE International Ltd. (UGE:TSX.V; UGEIF:OTCQB) with a Buy recommendation and a CA$3 per share target price. The current share price is CA$1.88.
"Despite UGE's incredible share price performance over the past year, the market continues to underappreciate the updated business model, and the company is trading at a discount to its intrinsic value," Keaney wrote.
The analyst presented the primary growth drivers and catalysts for this provider of community and commercial solar energy projects.
One, UGE still has upside potential to realize from its transition to a self-financed project business model from an engineering, procurement and construction-type one.
Along with allowing for more predictable revenue, this shift already has led to increased growth and will continue to do so, Keaney noted, driving increased margins. Over the past year, to Q3/20, UGE grew its project backlog 260% to US$112 million. During that period, self-financed projects expanded by 522% to now account for 94% of the backlog.
Today, the company's backlog stands at about US$145 million, Eight Capital estimates. The backlog encompasses confirmed projects expected to generate recurring revenue of about $14 million once deployed. UGE also "has ~$250 million (NPV10%) of unconfirmed projects which could add to this stream of recurring revenue as additional projects are secured," the analyst wrote.
"We expect continued organic growth as the company progresses its deep moat of projects," Keaney wrote. "We believe UGE will become EBITDA positive on a quarterly basis in Q1/22 and on an annual basis in 2022."
Two, Keaney indicated, the solar energy market "is primed for secular growth," driven by numerous factors. They include rising solar energy costs, market participants adopting environmental, social and corporate governance elements, companies moving to make their operations eco-friendly and the US$2.25 trillion U.S. Infrastructure Bill.
Three, Keaney purported that UGE is well positioned to take advantage of the expanding market, given its experience and business model. Speaking to its track record, the company completed 665 projects totaling more than 420 megawatts of power generation since its start in 2010. Many of its customers are owners of multiple properties and, thus, represent repeat business.
"We are forecasting material organic revenue and EBITDA growth in excess of its solar and renewable independent power producer peers," wrote Keaney, which ultimately will decrease the valuation gap.
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Disclosures from Eight Capital, UGE International Ltd., Initiating Coverage, April 6, 2021
Conflicts of Interest: Eight Capital has written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research and other businesses. The compensation of each Research Analyst/Associate involved in the preparation of this research report is based competitively upon several criteria, including performance assessment criteria, the quality of research and the value of the services they provide to clients of Eight Capital. The Research Analyst compensation pool includes revenues from several sources, including sales, trading and investment banking. Research analysts and associates do not receive compensation based upon revenues from specific investment banking transactions.
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Company Specific Disclosures Eight Capital and/or its affiliated companies have provided investment banking services to UGE International Ltd. in the past 12 months.