Baird Equity Research analysts Ben Kallo and Tyler Frank upgrade SolarCity Corp (NASDAQ:SCTY) to outperform.
We are upgrading SolarCity Corp (NASDAQ:SCTY) to Outperform and raising our price target to $71 following its announced close of SolarCity LMC Series I, LLC. The announcement represents one of the first solar asset backed securities (ABS), and separates SolarCity Corp (NASDAQ:SCTY) as one of the most innovative public solar financing companies. We have lowered our discount rate for future projects based on the 4.80% interest rate of the ABS, and believe the stock will react favorably as investors recalibrate their expectations for SolarCity.
SolarCity valuation
- Innovative ABS backed by solar leases and power purchase agreements (PPAs). The announcement represents one of the first solar asset backed securities brought to market by a public company. The 13-year security has an aggregate principal of ~$54.4M, an interest rate of 4.80%, and will mature in December 2026.
- Demonstrated ability to leverage its portfolio – expect additional ABSs in the near-term. SolarCity Corp (NASDAQ:SCTY) successfully leveraged its portfolio of projects to lower its cost of capital. We expect additional securitizations to occur as SolarCity continues to install PV systems. Additional ABSs could merit a lower cost of capital as investors become increasingly comfortable with the financing product. That said, an increase in interest rates would increase the required yield.
- Levered to North America residential and commercial solar which should provide sufficient demand for growth. We expect U.S. residential and commercial demand for solar PV projects to have 2012-2015 CAGRS of 21.9% and 14.1%, respectively, providing sufficient coverage for SolarCity Corp (NASDAQ:SCTY) to substantially increase its megawatts deployed each year.
- We continue to believe there are longer-term risks to the business model, but near-term rewards are greater. We still believe there are risks to SolarCity’s business model in the longer-term, including scale-up challenges and an increasing need for tax equity funds. That said, SolarCity Corp (NASDAQ:SCTY) has become one of the most innovative public solar financing companies.
- Raising price target to $71. Our price target is based on our estimates of the net present value of SolarCity Corp (NASDAQ:SCTY)’s current contracted projects and our estimates of projects deployed from 2014 through 2017. We use a 6% discount rate for initial contracts and 8% for renewal contracts and have discounted the cash flows to YE:2013. We previously used an 8% discount rate for initial contracts and 11% for renewals but believe lower rates are warranted based off this announcement.
