The Energy Report - Thu, Nov 2, 2017

Coverage Initiated on Solar Power Firm with 'Strong Backlog Powering Rapid Growth'

Analyst Pardeep Sangha with Haywood Securities explained the investment thesis for this provider of solar power projects to the commercial market.

Solar panels

In its Oct. 31 research note, Haywood Securities initiated coverage on UGE International Ltd. (UGE:TSX.V; UGEIF:OTC) with a Buy recommendation and 12-month target price of CA$1, analyst Pardeep Sangha reported. UGE is "undervalued" and currently trading "below its peer group average," Sangha wrote. Shares of UGE are currently trading at around $0.52.

Sangha, who titled the report, "Strong Backlog Powering Rapid Growth," indicated UGE, "one of the leading solar solution providers to mid-scale commercial and industrial clients in Ontario and in the Northeast U.S.," is "at a revenue inflection point and "turning the corner to profitability." The $6.3 million that the company generated in Q2/17, the most recent quarter for which a figure is available, exceeded the amount it generated in all of 2016. Also during that quarter, UGE was EBITDA positive for the first time, an achievement that Sangha said he expects to continue into 2018.

A major revenue growth driver in upcoming quarters is UGE's projects in the pipeline, purported Sangha. The firm's reported backlog as of the end of Q2/17 was $47.9 million. One such job is a contract secured in June "for CA$20M to build 15 new solar systems for the City of Peterborough." Work on that, the company's largest contract to date, will begin later this year, thereby contributing to next year's growth.

As for the future for UGE, Haywood Securities is "forecasting 280% revenue growth in 2017 followed by 71% in 2018," according to Sangha. These percentages are based on the solar solutions company "executing and implementing on projects already in its backlog." Also about UGE's prospects, the analyst noted, "We believe UGE could reach over $100M in revenue, making it a favorable acquisition target for larger solar or clean energy companies."

Future growth, Sangha wrote, is also likely to come from acquisitions and geographic expansion, which have been and continue to be part of the growth strategy of this company. For example, it purchased Carmanah Technologies' on-grid solar business in April, and this "added $10 million in annual revenue." Its acquisition of Endura Energy in February "strengthened its Canadian market position."

Also favorable to this energy firm's growth potential is the increasing opportunity in the commercial solar market, Sangha noted, which is "underserved and highly fragmented, providing UGE with numerous opportunities for growth and for consolidation." Further, solar costs "have declined over the past five years," which is "causing demand to flourish."

Disclosure:
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