Zacks lowers price target on SunSi due to unexpected decline in top-line
Steven Ralston, CFA
SunSi Energies (SSIE) reported disappointing financial results for the second fiscal quarter for the period ending November 30, 2011. Revenue for the second fiscal quarter was $3.56 million. Having acquired its interests in the Baokai and Wendeng facilities within the last nine months, the company did not record any revenues in the comparable prior-year quarter; hence year-over-year comparative analysis does not assist in the evaluation of the company’s financial performance. However, sequential quarterly analysis is appropriate. Due to an oversupply of polysilicon, sales at Wendeng declined 72.8% sequentially. Also, Baokai’s revenues declined 53.3%, which contributed to the 65.3% sequential decline in overall revenues. Many polysilicon makers in China and worldwide have temporarily shut down or ceased operations. As a result, SunSi’s management has closed both the Baokai and Wendeng facilities until after the Chinese New Year in mid-February, when management believes the TCS market will begin to improve in terms of volume and pricing.
Gross profit declined 94.7% sequentially to $107 thousand resulting in an overall gross margin of 3.0% with Wendeng’s gross margin declining from 31.4% to 4.4% sequentially. Baokai’s gross margin was stable at 2.0%. Being a distributor, Baokai’s gross margin is low and consistent since current sales come from pre-existing customers (prior to the acquisition) at a locked-in 2.0% margin. In order to aid the recovery in gross margin at Wendeng, the company has negotiated with its suppliers to reduce the price of some of the raw materials required to manufacture TCS.
Management attempted to cut costs with professional fees declining 17.7% to $186,819 and general and administrative expenses sequentially declining 48.1% to $760,442. For the quarter, the company reported a loss of $538,994 or ($0.02) per diluted share.
Using our valuation methodology based on price-to-sales due the character of SunSi’s enterprise, we now expect SunSi’s stock to trade in the middle of our estimated valuation range of 1.1 and 3.2 times normalized sales. After factoring an increase of shares outstanding, a 2.15 price-to-sales valuation projects at price target of $3.00.
We therefore lower our rating to Underperform as we lower our price target to $3.00.
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