Solar project developer ReneSola Ltd. (SOL: NYSE) reported financial results this week for the quarter ending June 2018. Revenue topped $27.8 million in the quarter well below the year ago period when a faster pace of development activity generated $44.8 million in sales. The negative year-over-year comparison was anticipated following the sale of ReneSola’s solar cell manufacturing operations in September 2017. Now the company is making its way with solar project development, engineering services and electricity sales from its owned solar power facilities.
Management had guided for sales in a range of $25 to $30 million in the June 2018 quarter. The good news was that ReneSola managed to squeeze more profit from the lower level of sales than it did a year ago on higher sales. Thus operating income was the same at $5.9 million.
It appears ReneSola shareholders are a tough bunch to please. Recent trading volume is well below the pace a year ago and even six months ago. What few traders still following the company bid the stock down in the first day of trading following the report. The shares are now trading at 8.9 times forward earnings.
The shares had already gone through something of a free fall beginning in late 2015, when the company announced intentions to reduce reliance on its solar module manufacturing business. The sale of the manufacturing unit to the company chief executive office announced in June 2017, did not help win many new friends even though it meant shedding US$450 million in debt. The deal was completed through the issuance of 180 million in new shares to the new manufacturing corporate entity in the control of RenaSola’s CEO.
Of course, the lower valuation is expected given that after restructuring the remaining company was much diminished in size. Furthermore, RenaSola’s common stock had been diluted. A lower valuation and thus lower stock price were expected. The deleveraging of the balance sheet to a 30% debt-to-equity ratio seems to have been lost in the discussion. RenaSola shareholders ended up with $90.5 million in net tangible assets at the end of fiscal year 2017, compared to $66.1 million a year earlier before the restructuring was completed. On a per share basis tangible assets increase to $0.17 compared to $0.14 per share before the deal was completed.
The rest of the valuation story for RenaSola may be in its new business model as a project developer and engineering firm. Notorious for delivering uneven sales and earnings, project developers have never commanded the valuation multiples of their more glamorous technology cousins. This is the especially the case for solar technology innovators that tend to get considerable attention as members of the elite and forward thinking renewable energy industry. According to New York University, a broad group of engineering and construction firms, whose activities are similar to ReneSola’s consulting and project development work, is currently trading at 24.83 times forward earnings. Semiconductors producers, including solar module manufacturers, are trading at 67.96 times forward earnings.
Of course, ReneSola is not trading even with its new peer group of engineering firms. It is a Chinese firm that recently sold off a significant portion of its assets in a related-party transaction. Even if that red flag had not been raised, the resulting business model created by the restructuring has not been well received by shareholders.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries. Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.