Growth Stocks: Sunrun

Although two months have passed since the publication of its results, but Sunrun Inc. (RUN.US) is the leading provider of residential services in the United States, including solar, storage and energy services. Therefore, it is worth entering to assess the privileged situation in which renewable energy companies find themselves in the face of the war in Russia and Ukraine.

Since RUN bills most of its customers in cash from the outset, the company has created a framework for valuing the business using what it calls "net worth per subscriber," which calculates cash payments from contracted customers and payments of those who renew the contract, to obtain a number of gross subscriber value. Then subtract all the associated costs for achieving that subscription, including installation, sale, post-sale, general and administrative expenses, etc. Then, applying that framework to its total customer base, the company calculates gross profit assets against the debt financing needed to realize the net worth of productive assets.

At the end of 2021, the total net assets were 7,064 million dollars.

Growth Outlook

The Build Back Better (BBB) ​​framework contains a host of tax incentives and subsidies that would support solar infrastructure and serve as a boon to the residential solar market. According to SEIA and Wood Mackenzie, residential solar installed capacity is estimated to explode between 2020 and 2023, before leveling off:

source: SEIA and Wood Mackenzie

The report stated that industry growth could stall when the Solar Investment Tax Credit or "ITC" falls in 2024: "The industry is poised for a string of record years until 2024, when ITC is scheduled to be withdrawn entirely ". However, the company's BBB (Better Business Bureau) rating proposal indicated that the ITC would be extended for at least another 10 years, that is, until 2034 and would temporarily adjust the federal subsidy from 26% to 30%. Below is the estimated difference of solar installations between having ITC extension and not having it:

source: SEIA and Wood Mackenzie

The plan has not yet been finalized, but there is consensus that some form of BBB will be approved and that ITC will ultimately be expanded as it has been for many years. This will be a boon to the solar installation industry and will particularly benefit Sunrun.
Gross Profit Assumption

In the fourth quarter of 2020, Sunrun's management adjusted the discount rate applied to its total gross profit assets from 6% to 5% in February. The company justified this change on the basis of lower financing costs and it may be justified. While the company's overall debt load is well supported by its solar assets, it's important to pay attention to the company's most recent interest expense. In the third quarter of 2021, total interest expense was $89 million and $356 million at the run rate. Against a total debt balance of $6.137 billion, the cost of borrowing is actually 5.8%, closer to a 6% discount rate. Another factor investors should keep in mind is that contractual interest rates on subordinated debt range from 7-10%, with such loans rising 19% in the last quarter. In addition, the company's convertible bonds also traded above par in early 2021 at less than $0.80 today.

Finally, the 10-year US Treasury has an average yield of 3.1% over the last 10 years (post-financial crisis), yet Sunrun only applies a 190bp spread to the US government. For context, the The US government is rated "AA" by the credit bureaus, yet Sunrun takes loans comparable to a "B" rated credit issuer. For context, the effective credit spread for "B" rated issuers is 3.47%.

Since Sunrun does not currently generate any EBITDA, if we go further down the income statement, we can use gross return as a performance measure to broadly assess leverage. Today, total debt minus total cash and cash equivalents relative to TTM (12-month) gross profit has more than doubled to 21.6x in the last two years:

source: YCharts

While solar assets are reasonably predictable and produce quality cash flows, having a leverage ratio of 21.6x could present some risks, particularly should defaults increase. Sunrun's calculations provide a binary sensitivity analysis showing what your solar assets would be worth under default scenarios of 0% and 5%.

During the last market economic cycle, which included the housing crisis, calculations show that mortgage delinquency rates averaged around 3.13% (applying a 5% cap to the worst periods from 2008 to 2015 given the circumstances). extraordinary).
So the Sunrun Board's assumption range is reasonable and shows a PV cash flow “delta” of around $200 million between the two scenarios. With that, increasing customer defaults is a lower probability event, but assuming 0% vs. ~3% is odd, especially since they are trending around 2% or more today.

However, even using management's assumptions, higher borrowing costs due to a change in risk perception in the debt market (i.e., of banks or bondholders), or simply higher yields on the treasury, could force management to reverse course and raise the discount rate to 6%.
  
Conclusion

Sunrun continues to post record revenue growth, but the stock has underperformed in part due to concerns around NEM 3. The proposal, which was criticized by industry leaders, environmentalists and California workers, was called a lockdown measure. elimination of solar energy on the roofs of individuals. The California Public Utilities Commission (CPUC) decided to delay indefinitely the much-criticized Net Energy Metering (NEM) 3.0 proposal. Inflation and its impact on supply chain costs, among other factors.

Furthermore, Sunrun's 5% imputed discount rate could prove too generous, or at least should be viewed with skepticism given the extraordinary interest rate environment that is expected to change during 2022. If Sunrun's perceived creditworthiness deteriorates, stocks could have even more room to fall. Even so, the environment regarding fossil fuels and the demand for oil that could fall due to international sanctions on Russia, represent a great opportunity for the most risky investors.
 

Technical analysis

The company, which was favored by the renewables bubble during the end of 2020 and the beginning of 2021, ended up correcting up to the key support in its price at $19.66 per share. Historical resistance level for the company during 2019 and 2020.

source: xStation

The rebound just at that level during the month of February has signaled the intention of investors to look for new levels in the next reference zone, which was support during 2021, at $44.20. Using fibonacci from the last relative maximum on the monthly chart (maximum of the month of November), to the minimum of recent February, places the target zone between 50-61.8% of the retracement. Right on target at $44.20 per share.

Darío García, EFA
XTB Spain