Merrill Lynch has maintained buy rating on Suzlon Energy with target price of Rs 1550 considering it is 31% discount to its current multiples, 9% discount to DCF and 29% discount to its peers despite Suzlon's superior growth and return profile.
REpower: Double Sales & PAT likely 6x; Buy on Suzlon
We reiterate our view of REpower doubling its volumes to 1GW+ by CY09E v/s 492MW in CY06 and that transforming it to multiply its PAT 6.5x to Euro46mn over CY06-09E. This view is reinforced as REpower has won a series of new orders taking the total order backlog to 1783MW, providing 58% visibility to MLe REpower sales till CY09E. Company expects to close another 1000MW of new orders in 2HCY07, which should ensure 100% visibility of sales targets till CY09E. Maintain Buy on Suzlon as it is the key beneficiary of REpower turnaround.
REpower wins 160MW order (10% of current order book)
REpower won a 160MW order (10% of current order book) from EPURON GmbH (a sub. of the listed company Conergy AG) for the delivery of 80 wind turbines, which are to be implemented in Germany, Italy, France and Australia in CY09.
New orders of 1000MW under negotiation
REpower is negotiating new orders worth 1000MW, which are likely announced in 2HCY07, as per sources. This, coupled with order backlog of 1783MW, should ensure 100% visibility of MLe sales till CY09E. Doubling of volume, development of captive components & improving operating leverage would transform REpower into a 6.5% EBITDA margin company (assuming no integration benefit from Suzlon) v/s 2.7% in CY06. We expect REpower to account for 3% of Suzlon's PAT in FY08E (at 34% consolidation) and 12% by FY10E on full consolidation.
Maintain buy on Suzlon; PO Rs 1550
We like Suzlon for a) its global delivery model, b) macro tailwind, and c) multifold expansion in the addressable market, driving its 41% EPS CAGR over FY07-10E. Our PO of Rs 1550 is based on 22x 1-yr forward PER - 31%, 9% & 29% discount to its current PER, DCF and its peers resp., despite its superior growth & returns.
Price objective basis & risk
Our PO of Rs 1,550 is based on 22x 1-year forward earnings, which we believe is conservative considering it is 31% discount to its current multiples, 9% discount to DCF and 29% discount to its peers despite Suzlon's superior growth and return profile. We have also reduced our target PER multiple to 22x vs 23x earlier to factor in near term disappointment in earnings.
Risks: Headwind for wind turbine business & execution risk in the wake of component shortages. Also, we note that the deal with Areva is not a put/call forward sale structure and hence if REpower stock shoots up in the future then Suzlon may have to pay a higher price for acquiring Areva's stake.
REpower: Double Sales & PAT likely 6x; Buy on Suzlon
We reiterate our view of REpower doubling its volumes to 1GW+ by CY09E v/s 492MW in CY06 and that transforming it to multiply its PAT 6.5x to Euro46mn over CY06-09E. This view is reinforced as REpower has won a series of new orders taking the total order backlog to 1783MW, providing 58% visibility to MLe REpower sales till CY09E. Company expects to close another 1000MW of new orders in 2HCY07, which should ensure 100% visibility of sales targets till CY09E. Maintain Buy on Suzlon as it is the key beneficiary of REpower turnaround.
REpower wins 160MW order (10% of current order book)
REpower won a 160MW order (10% of current order book) from EPURON GmbH (a sub. of the listed company Conergy AG) for the delivery of 80 wind turbines, which are to be implemented in Germany, Italy, France and Australia in CY09.
New orders of 1000MW under negotiation
REpower is negotiating new orders worth 1000MW, which are likely announced in 2HCY07, as per sources. This, coupled with order backlog of 1783MW, should ensure 100% visibility of MLe sales till CY09E. Doubling of volume, development of captive components & improving operating leverage would transform REpower into a 6.5% EBITDA margin company (assuming no integration benefit from Suzlon) v/s 2.7% in CY06. We expect REpower to account for 3% of Suzlon's PAT in FY08E (at 34% consolidation) and 12% by FY10E on full consolidation.
Maintain buy on Suzlon; PO Rs 1550
We like Suzlon for a) its global delivery model, b) macro tailwind, and c) multifold expansion in the addressable market, driving its 41% EPS CAGR over FY07-10E. Our PO of Rs 1550 is based on 22x 1-yr forward PER - 31%, 9% & 29% discount to its current PER, DCF and its peers resp., despite its superior growth & returns.
Price objective basis & risk
Our PO of Rs 1,550 is based on 22x 1-year forward earnings, which we believe is conservative considering it is 31% discount to its current multiples, 9% discount to DCF and 29% discount to its peers despite Suzlon's superior growth and return profile. We have also reduced our target PER multiple to 22x vs 23x earlier to factor in near term disappointment in earnings.
Risks: Headwind for wind turbine business & execution risk in the wake of component shortages. Also, we note that the deal with Areva is not a put/call forward sale structure and hence if REpower stock shoots up in the future then Suzlon may have to pay a higher price for acquiring Areva's stake.
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