Solar power IPO market is heating up
Canada's Photowatt is set to enter a crowded field
DAVID PARKINSON
theglobeandmail.com
It's getting pretty crowded under the sun.
When Canadian solar energy equipment maker Photowatt Technologies Inc. completes its initial public offering, it will join a rapidly growing list of solar stocks competing for the attention of international investors. Photowatt, which is expected to formally price its offering this week, is the sixth solar IPO to hit global markets since mid-November.
This week's jittery markets didn't make ideal conditions for pricing the IPO, as several stocks in the volatile sector took a hit. But analysts said the sudden wealth of solar choices for investors may have been an even bigger factor in weighing down the IPO price.
The company, which is being spun off from Cambridge, Ont.-based equipment maker ATS Automation Tooling Systems Inc., had already disappointed investors when it announced the IPO last month, pegging its preliminary pricing range at $15-$17 (U.S.) a share -- well below Street expectations of something north of $25. Analysts had valued Photowatt at about $700-million, but the IPO -- in which ATS initially planned to sell 10.9 million Photowatt shares or 40 per cent of the company -- may value the solar assets at a much more modest $440-million if the offering is priced at mid-range.
"I thought it would have been at least 50 per cent higher," said analyst Michael Willemse of CIBC World Markets Inc.
ATS's stock price tumbled almost 15 per cent on Feb. 14, the day the company unveiled the details of the long-anticipated IPO. Three analysts downgraded ATS on the news.
Mr. Willemse said the timing of the offering, coming on the heels of the recent string of IPOs, mostly out of China, that have combined for more than $1-billion worth of solar-sector equities hitting the market, probably hurt the price. "There's a lot of supply out there," he said.
The rush of new solar power-related issues has contributed to an up and down year for the sector, despite the increased interest in renewable energy, as newcomers jockey for position and investors separate the wheat from the chaff. Two late-2006 IPOs -- U.S.-based First Solar Inc. and China's Trina Solar Ltd. -- have risen 163 per cent and 151 per cent, respectively, from their IPO prices. Another more established U.S. solar firm, Sunpower Corp., which began trading on the Nasdaq Stock Market in late 2005, is up 141 per cent since its debut. Yet underperformers have been punished: Energy Conversion Devices Inc. has seen its stock slump 23 per cent in the past year, hurt by disappointing financial results.
In general, the solar group has outperformed the broader market, buoyed by strong long-term growth prospects. Global demand for solar power -- more formally known as photovoltaic (PV) electricity -- has been rising 20-30 per cent a year, as the declining costs of PV generation, relative to conventional electricity, continue to encourage more jurisdictions to turn to solar.
"We think that [growth] is sustainable," said Pavel Molchanov, an analyst at Raymond James in Houston. He noted that although PV electricity still costs about two to three times as much to produce as conventional electricity, that has come down from 10 times in the 1970s. "The cost has decreased 90 per cent in 30 years," he said, adding that solar should reach parity with conventional generation by about 2015.
"The outlook is exceptionally strong," he said.
Those prospects have encouraged the swelling of the ranks, and that, in turn, is raising the sector's profile on the Street. Investment banking heavyweight Merrill Lynch this week launched a monthly report dedicated to the solar industry.
The world's leading markets for solar power are Germany and Japan (Germany produces almost five times as much PV electricity as the United States), but analysts are encouraged by the growth prospects in such diverse jurisdictions as California, Spain, Italy and Australia. Still, the big story is shaping up to be in China, thanks to its huge and rapidly accelerating appetite for energy supplies.
Merrill analyst Srini Pajjuri's top picks in the sector include Sunpower and China-based Suntech Power Holdings Co. Ltd, the two biggest solar cell companies in their respective countries. He also likes two recent China-based IPOs, Trina Solar and ReneSola Ltd.
Mr. Molchanov of Raymond James also has "outperform" recommendations on Sunpower and Suntech, which he describes as "two of the leading players" in the burgeoning global industry. He described Canada's Photowatt as "toward the smaller end" of participants in the group, but said it investors in the new listing should still expect to benefit from the sector's bullish long-term fundamentals.
Mr. Willemse of CIBC World Markets agreed that the stock has upside potential. He said Photowatt could well trade up toward $26 a share after the IPO. |
