SOL - Emeren Group: A Work In Progress

2023-04-05 03:05:21 ET

Summary

• If SOL can execute on its plan and strategy, it has the potential to break out of its tight trading range.
• A key to its success will be continuing to grow strong in Europe, while growing incrementally in the European and U.S. markets.
• One major headwind will be the global economy, which if it continues to weaken in 2023, will push potential positive results further out into the future.
• While it appears the company has potential to grow revenue going forward, it must shore up its profitability metrics to improve its performance.
• The company will suffer if it doesn't stay within its current niche after transitioning from one business segment to another in the solar sector in the past.

The overall solar sector has had a tough year, with the exceptions of First Solar, Inc. ( FSLR ), Array Technologies ( ARRY ), and Maxeon Solar Technologies, Ltd. ( MAXN ). The majority of publicly traded solar companies are not performing well, including Emeren Group Ltd ( SOL ).

There have been a number of factors influencing the solar sector over the last couple of years, including increasing competition, some uncertainty in regard to government policies in different jurisdictions, solar companies surpassing peers technologically, and market sentiment in response to the Federal Reserve and other central banks around the world.

Like many of its competitors, SOL stock has had a mixed performance over the last year or two, plunging from a high of approximately $35.50 per share on January 18, 2021, to a 52-week low of $3.46 on May 12, 2022.

It tried to rally after the low, but after managing to climb to close to $7.50 per share on August 8, 2022, it once again plummeted to under $4.00 per share, and that has now become a bottom since October 24, 2022, and has tested that level a couple of more times and held.

Since early October 2022 it has traded in a range of around $4.00 per share to $5.50 per share, and that will likely continue until confirmation it is able to execute on managements growth guidance.

In this article we'll look at its latest numbers, where it's looking for growth, and why it's probably going to struggle to meet expectations based upon what I believe is going to be a weakening global economy as 2023 unfolds.

Some of the numbers

Revenue in the fourth quarter of 2022 was $40.80 million, up 78.84 percent year-over-year, but missing by $5.78 million. Revenue for full year 2022 came in at $81.4 million.

GAAP gross profit in the fourth quarter of 2022 was $11.1 million, up from the $8.5 million in gross profit generated in the third quarter of 2022, and up $7.2 million year-over-year.

Gross margin in the reporting period was 30.1 percent, and EBITDA was $17.4 million for full year 2022.

Operating expenses in the fourth quarter of 2022 were $6.2 million, compared to operating expenses of $8.7 million in the fourth quarter of 2021.

Net income was $4.8 million, or GAAP EPS of $0.08, beating by $0.01.

At the end of calendar 2022 the company had a cash balance of $107.00 million, compared to a cash balance of $123.00 million at the end of calendar 2021. The decline in its cash balance was attributed to the acquisition of Emeren and projects in Hungary and Poland.

While its debt ratio dropped from 12.8 percent in the third quarter of 2022, it was still a hefty 11.00 percent in the fourth quarter of 2022.

Concerning guidance, management noted the company entered 2023 with 3 gigawatts of mid-to-late-stage pipeline, which they believe the company can monetize at about 400 megawatts to 450 megawatts in 2023. Further out, it has the goal of monetizing at least 500 megawatts to 600 megawatts annually.

As for first half of 2023 revenue guidance, SOL expects it to be in a range of $70.00 million to $75.00 million. Full year 2023 revenue is projected to be about $150.00 million.

Emeren needs to figure business it is in

Over time, Emeren has transitioned originally being a builder of solar panels, to a solar plant builder, to a power plant operator, and most recently, "an independent power producer and provider of solar farm-building services."

While some consider the changes to be a good strategy, I consider it a negative, in the sense that the company doesn't know what business it is actually in, and changes what it does when it hasn't been able to successfully compete in the other businesses it had been operating in.

I think this is the reason it hasn't been able to find any sustainable support for its share price, and why it's unlikely to until it settles into a business that is identifiable and enduring. To rapidly transition from a different core business in fairly rapid succession means the company has an identity crisis it must solve in order for the market to understand what it does and how to analyze the company.

Assuming the company has found its niche and doesn't make decisions to move on to the next big thing if it can't compete in its current business focus, it does look like it has a chance to at least increase revenue going forward, based upon its revenue guidance for 2023 and if it can successfully execute its strategy.

If it has found a segment of the solar sector that it can consistently and sustainably grow in, the key from there is improving on a number of its profitability metrics in order to generate a profit on a steady basis.

Profitability

As the numbers from the company's last earnings report show, it was able to produce positive net income and EPS. The question now is whether it can continue to do so if it can continue to boost revenue.

Concerning some of its profitability metrics, it does show promise with EBIT margin [TTM], EBITDA margin [TTM], and Net income margin [TTM], although it's underperforming in levered FCF margin [TTM].

While it's not as strong with its EBIT margin, it's still at 9.17 percent, compared to the sector median of 9.72 percent, lower by 5.58 percent. With its EBITDA margin it's at 18.61 percent, beating the sector median of 13.29 percent by 40.05 percent. With the important net income margin metric, it was at 7.25 percent, compared to the industry average of 6.49 percent, better by 11.66 percent.

Levered FCF margin was -31.66 percent, far below the sector median of 3.85 percent.

Areas where it significantly underperformed the sector were return on equity, return on capital, and return on assets. Return on equity was 1.55 percent, compared to the sector median of 13.67 percent, lower by 88.67 percent. Return on capital was 0.96 percent, compared to the sector median of 6.96 percent, down by 86.25 percent. Return on assets was 1.18 percent, compared to the sector median of 5.16 percent, lower by 77.14 percent.

Another weak area was in cash from operations [TTM], which was -$(35.25) million, compared to the sector median of $194.71 million.

Its profitability metrics are a mixed bag, and if they do improve as the company increases revenue, the company could be poised for a nice run in the latter half of 2023 and early 2024, again, assuming it can execute in alignment with its guidance.

Outside of its executing on its plan and strategy, the outside factor is the macro-economic conditions that many believe, including myself, are probably going to get worse in the second half. If it plays out that way, a lot of the potential growth trajectory of SOL will be pushed out further into the future. Under that scenario the share price would probably crash and remain low until confirmation an economic recovery is on the way.

Conclusion

Europe accounts for approximately 63 percent of SOL's business, with China representing 22 percent, and the U.S. market the remaining 15 percent. So as far as researching the company, Europe is by far the most important market it competes in, and probably the most favorable and receptive to the business it now competes in.

As I mentioned earlier, SOL needs to lock into a niche and remain in it in order to provide the clarity and visibility investors are looking for when considering whether or not to take a position in the company. If it were to pivot again, I think it would lose a lot of credibility and attractiveness to investors.

If it maintains its current focus, it looks like it has the potential to significantly increase revenue over the next couple of years. On the other hand, if we do get hit by a strong recession, that will be pushed further out into the future, and would probably result in some significant pressure on the stock.

Concerning long-term profitability, the company will have to prove it can improve on a number of its profitability metrics in order to generate more optimism for its bottom line, although in some of the margin metrics it's not doing too bad, at least as measured against the sector median.

The European market is the key to its growth over the next couple of years, and if it can continue to gain ground there while incrementally growing out its business in China and the U.S., it does have the potential to finally break out of its tight trading range.

If it doesn't execute on its plan and strategy, or if economic conditions worsen through 2023, things are going to get worse before they get better but could also provide a far more attractive entry point and cost basis under those conditions.

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