TerraForm Power Inc. (NASDAQ: TERP) was running with the bulls Tuesday morning, following a crucial upgraded from a key brokerage firm. Oppenheimer sees some solid upside in this utility, not to mention investment grade assets that set it apart from its competitors.
The brokerage firm has an Outperform rating and a $10 price target that reflects its estimate of intrinsic portfolio value, also implying an upside of roughly 16%. Oppenheimer’s run-off scenario suggests $10 per share in value, with a 10% discount rate on future dividends. The firm is also assuming that SunEdison and TerraForm close the Invenergy and Vivint Solar transactions, respectively. However this does exclude SunEdison’s interest payment support and that TerraForm accrues sufficient cash from operations to pay off all of its debt.
There are governance issues still looming, but the concerns are overdone. Considering recent management changes, Oppenheimer believes many investors have rightfully identified concerns about arm’s-length dealing between TerraForm and SunEdison, despite the formal arrangements to ensure fairness. While the firm is somewhat cautious on this issue, it believes that TerraForm remains a strategic asset to SunEdison.
Also Oppenheimer believes that TerraForm’s investment-grade assets support the cash flow. While the firm assumes a 10% discount rate on future dividends, it believes that the company’s cash flows are investment-grade and should trade in line with similar assets. At a 5% discount rate, the value of shares goes to $13. Oppenheimer employs a 10% discount rate to account for uncertainty around terms on TerraForm’s liquidity resources and governance risk.
Oppenheimer detailed in its report:
We are upgrading TerraForm Power to Outperform as we believe shares are currently trading well below the intrinsic value of the asset portfolio, with risk/reward at current levels substantially weighted to the upside. With acquisition resources limited due to the Invenergy and Vivint Solar deals (which we expect to close), we believe the run-off scenario provides an appropriate base case for investing in the stock. We believe the most recent leg down on shares after management changes is overdone and offers a compelling entry point on shares.
Shares of TerraForm were trading up over 21% at $8.37 Tuesday, with a consensus analyst price target of $23.94 and a 52-week trading range of $6.73 to $42.66.
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