Zacks upgrades SunSi Energies to Neutral
Steven Ralston, CFA
The stock of SunSi Energies (SSIE) has been under considerable pressure for the last two weeks as investors digested the impact of the results of the second fiscal quarter and the news of the temporary shut down of production at the company’s Baokai and Wendeng facilities. However, the recent price decline of SunSi’s stock now sufficiently discounts the expected revenue decline due to the oversupply in the photovoltaic supply chain. With polysilicon prices having rebounded from $27/kg and stabilizing in the $28/kg to $31/kg range in northeast Asia, the plants are expected to resume production this month.
The Chinese government has proposed a policy to support the polysilicon industry by encouraging mergers and acquisitions of companies without economies of scale and other competitive advantages. Therefore, it is expected that large Chinese solar companies will survive and receive support from Chinese Banks. In addition, the Chinese government is expected to promote addition polysilicon capacity through the installation of 3 gigawatts of new solar capacity in 2012.
Polysilicon manufacturers elsewhere in the world are expected to resume production after temporarily shutting down all or part of their capacity in order to alleviate pressure on polysilicon prices. Nevertheless, the outlook for the first half of 2012 is still uncertain for polysilicon with spot prices in Asia expected to remain depressed (below $32 per kg).
Using our valuation methodology based on price-to-sales due the character of SunSi’s enterprise, we expect SunSi’s stock to continue trading somewhat below the middle of our estimated valuation range of 1.1 and 3.2 times normalized sales. After factoring an increase of shares outstanding, a 1.65 price-to-sales valuation projects at price target of $2.25.
We are upgrading our rating to Neutral and adjusting our price target to $2.25.
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