Company Overview: Shoals Technologies Group, Inc. (NASDAQ: SHLS) provides electrical systems and components that carry electricity produced by solar panels to inverter and power grid. These products are bundled as a system, namely Electrical Balance of System (“EBOS”). The system encompasses cable assemblies, inline fuses, combiners, disconnects, recombiners, and so on. Its EBOS are predominantly sold to Engineering, Procurement and Construction firms (EPCs) that build solar energy projects in the US and international markets. As of December 2020, SHLS derives about 66% of revenue from the sale of system solutions. On the geography front, 99% of revenues were derived from the US, while international markets constituted just 1%.

SHLS Details

Concrete Plans in Battery Storage and EV Charging: SHLS plans to ramp up solar EBOS as it believes the sale of solar energy projects embedded with battery storage systems will see more demand than without storage systems. SHLS has its proprietary ‘plug-n-play’ technology that results in 43% lower installation costs and 20% lower material costs. This helps to tear down the installation costs of solar energy projects with battery storage systems. Notably, the solar industry is increasingly looking for new technology to save installation and labour costs that had grown from 17% of the total costs in 2015 to more than 29% in 2020, according to Wood Mackenzie as mentioned in the prospectus. The company’s ‘Big Lead Assembly’ (BLA) is a big leap in the industry as it does not require installation to be done by licensed electricians.

Shoals Technologies plans to replicate its low-cost EBOS technology in Electric Vehicle (EV) charging infrastructure. As cited in the prospectus, BloombergNEF estimates that nearly $2.3 billion will be spent on electric vehicle infrastructure in the US from 2021 through 2023. The installation costs make-up for about 55% of the total costs. The company’s proprietary technology in solar energy will provide a significant cost advantage. SHLS is in talks with EPC firms to supply prefabricated components with the objective of reducing the amount of field labour installation. SHLS plans to launch electric vehicle charging systems by Q2 2022, with first sales to be deployed in Q4 2021.

Figure 1. EV Charging System Roll-out Plans: 

Source: Company Reports

SHLS is targeting to reduce 20%-30% in installation costs of EV charging systems with its proprietary technology. It has already pitched its EV charging system roll-out plans with its existing EPC customers. It also targets Charge Point Operators that own and operate charging stations. The company is expecting the addressable market for EV charging points to reach $1.3 billion in the US by 2025. SHLS plans to launch four product families in two phases.

Figure 2. SHLS EV Charging Systems:

Source: Company Reports

Historical Financial Trend:

The company’s EBOS system offers mission-critical solutions for ground-mounted solar energy projects. The surge in solar installations in the US was driven by zero-carbon mandate by the regulator, extension of Investment Tax Credit, and reducing Levelized Cost of Energy. The ground-mounted solar PV installation is expected to reach a CAGR of 11.4% in 2023. Through low-cost technology, SHLS is well-position to ride on the trend. It had witnessed a surge in solar systems offtake, as revenues reached a CAGR of 30% in the last two fiscal years. As of March 2021, SHLS had $181 million backlog orders, an increase of 42% over the same period last year. Its adjusted EBITDA showed a healthy growth aided by volume growth and manufacturing efficiencies.

Quarterly Performance:

SHLS is a recent debutant to the stock exchange. It becomes a publicly listed company in January 2021. The company converted about eight major EPC customers in less than three months. About 21 new prospects have been identified since January 2021, and 5 placing order within 90 days of the first sales interaction. Its System Solutions revenues were up 46% in Q1 FY21 over pcp. Gross margin improved to 41.2% on the back of high-margin sales mix strategies and increased volumes. It had posted a net loss of $8.3 million in Q1 FY21 as compared to net income of $9.3 million in pcp mainly due to early repayment of its term loan facility.

Figure 4. First Quarter Performance for March 2021:

Source: Company Reports

On the balance sheet, SHLS had a cash and bank balance of $4.2 million as of March 2021, providing adequate funding to meet the current maturity portion of its long-term debt of $3.5 million. As mentioned in the December 2020 annual report, SHLS had $80 million available for borrowings under its revolving line of credit, indicating strong liquidity.

Full-year FY20 Performance:

SHLS is mulling international reach with the expansion of its sales team in Europe and is expected to see the order from that region. The company has several products lined up. It had shipped pre-production samples of first wire management products and expecting commercial sales to hit in the fourth quarter of 2021. It had installed new IV curve benchmarking products in two projects earlier this year. It is expecting high-capacity plug-n-play wire harnesses to hit the market by Q3 FY22. This translated to healthy revenues in FY20 over the previous year. The company had posted 34% increase in net income because of lower manufacturing costs and improved material planning, which in turn reduced logistics costs. Its high-margin plug-n-play products contributed to a rise in profitability.

Top 10 Shareholders: The top 10 shareholders together form ~61.43% of the total shareholding. Fidelity Management & Research Company LLC and T. Rowe Price Associates, Inc. hold a maximum stake in the company at 12.48% and 11.23%, respectively.

Figure 6. Top 10 Shareholders

Key Metrics: A surge in customer orders for low-cost solar energy technology supported by investments in new product launches lifted revenue growth. The company continue to report healthy gross margin aided by its high-margin BLA ‘plug-n-play’ systems. Due to low inventory requirements, SHLS reported healthy current ratio.

Figure 7. Key Financial Metrics

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: SHLS reaffirmed its outlook for FY21. It is expecting revenue to be in the range of $230-$240 million. Adjusted EBITDA to be in the range of $75-$80 million. The company is expecting to post net income in the range of $47-$51 million. As per the Q1 FY21 results, SHLS is expecting to achieve about 45% of its revenues to be recorded in the first half of 2021.

Key Risks: SHLS has a high customer concentration risk, with two large customers accounted for ~40% of revenue in FY20. Demand for its products was highly influenced by trends in ground-mounted solar energy projects. The downward trending Levelized Cost of Energy increases competition from EPCs may put pressure on the company’s margins. Change in tax credits and tariff regulations may adversely affect the demand patterns and solar offtake. SHLS is exposed to cyclical trends of solar PV installations. A drop in electricity prices may negatively impact solar energy project owners.

Valuation Methodology: EV to Sales Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: SHLS has delivered 1-month and 3-month negative returns of ~8.26% and ~15.41%, respectively. The stock is trading below the average of the 52-week high price of $44.04 and 52-week low price of $27.10, indicating an accumulation opportunity. We have valued the stock using EV to Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a premium compared to its peer median EV/Sales (NTM Trading multiple), due to its strong order backlogs, product launches between 2021 and 2022, and foray into battery storage and electric vehicle charging market by Q4 2021. For this purpose, we have taken peers such as Energous Corp (NASDAQ: WATT), Advent Technologies Holdings Inc. (NASDAQ: ADN), ChargePoint Holdings Inc. (NYSE: CHPT), to name a few. Considering the healthy revenue growth, order backlogs, consistent EBITDA generation, and adequate liquidity, we give a “Buy” recommendation on the stock at the current market price of US $29.42, up ~2.22% on May 10, 2021.

SHLS Weekly Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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