Analyst Sees 50% More Upside in SunEdison After First Wind Acquisition

What stands out heavily in the research note on SunEdison is not the Merrill Lynch rating of Buy. It is that the former $28 price target was moved up to $32, based on higher pipeline valuation. This represents a near-50% implied gain, if a sum of the parts analysis is accurate.

The analysts also noted that even the 9.2 multiple paid by TerraForm is toward the low end of the valuation range for recent operating asset purchases. The analysts said, “Our first take on deal valuation suggests substantial accretion potential from the future dropdown to TerraForm of new asset additions to SUNE’s pipeline.”

In order to reach a full potential value, the analysts noted that SunEdison must navigate wind-related execution risk unique to a solar developer. The team said:

The good news is the deal’s earnout provision requires SUNE to retain key First Wind employees who have developed, own and/or operated over 1GW of contracted wind generation in the United States. SunEdison’s assertion that the 1.6GW pipeline is fully tax-credit (ITC and PTC) compliant also suggests to us that at least a portion of project related expenditures have already been incurred at most if not all projects due to continuous construction requirements for eligibility. Finally, we note that Terraform will also face recontracting risk related to certain operating First Wind assets that could impact sponsor cash flows, in our view.

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Merrill Lynch’s estimates were unchanged, and the firm plans to update its financial model when the deal closes in the first quarter of 2015.

What investors need to keep in mind here is that SunEdison shares rose to $21.48 after previously closing at $16.61. That is already a very steep jump up in the stock, but now the team is suggesting an even higher price objective.

SunEdison shares were down marginally at $21.41 in late Wednesday trading, against a 52-week trading range of $11.11 to $24.35. Analysts have a consensus price target of $26.71, and the highest analyst price target is all the way up at $35.00.