Company Overview: Array Technologies, Inc. (NASDAQ: ARRY) manufactures single-axis rotating tracker that is installed in ground-mounted solar panels. Unlike fixed-tilt mounting systems, the company’s DuraTrack moves the solar panels fitted in multiple rows throughout the day to maintain an optimal orientation to the sun. The company patented its rotating gear drive systems technology that does not expire until February 2030. Its products were sold to engineering, procurement, and construction firms (EPCs), solar developers, independent power producers, and utilities. ARRY predominantly caters to the US market with ~92% of FY20 revenues. Australia and the rest of the world make up the remaining sales.

ARRY Details

Proprietary Solar Tracking Technology Reduces Energy Costs: ARRY claims that its DuraTrack solar tracking system generates 25% more energy than fixed-tilt mounting systems with its single-axis rotation technology increases the energy production during the evening hours. According to Bloomberg, the technology saw 22% reduction in Levelized Cost of Energy (LCOE) to $39/MWh as compared to $50/MWh in fixed-tilt mounting systems. The system uses lesser hardware components and faster to construct and is more reliable.

Figure 1. The Solar Tracking Systems Delivers Lower LCOE and it is Faster and Reliable:

Source: Company Reports

About 70% of all ground-mounted solar systems in the US uses trackers, according to IHS Markit. Ground-mounted solar is the fastest-growing energy source in the US. It is over 6x the size of rooftop solar installation for the residential market. More than 1 in every 4 solar modules installed utilizes DuraTrack. Demand for solar trackers outpaced overall solar market growth of over 20%.

Figure 2. Ground Mounted PV to Drive the Renewables:

Source: Company Reports

The company continues to invest in R&D to drive down the LCOE. It had made a fresh investment in technology company during the Q1 FY21 that potentially reduces the cost of installing trackers. In addition, ARRY opened a new research facility, Array Tech Research Center, in Phoenix, Arizona dedicated to field testing of advanced solar tracker technology.

Historical Financial Trend:

ARRY reported steady revenue growth in the past three years aided by a conducive policy environment for green energy. The new presidential government in the US pledges to re-join the Paris Climate Agreement to achieve zero-carbon electricity by 2035 and to achieve net-zero emissions by 2050. The government facilitated the two-year extension of the Investment Tax Credit (ITC) (for 26%). Further, ARRY continues to push international expansion – it had signed a 1.4 GW agreement with Lightsource BP recently to provide tracking systems across the US, Australia, and Spain. In FY20, ARRY added 38 new customers with 8 serving the international markets. ARRY’s assembly-focused manufacturing model with ~80% of materials procured from third-party suppliers helped to drive down the cost of goods sold per watt.

Figure 3. 3-Year Financial Trend:

Source: Company Reports

ARRY saw a 32% increase in total MW delivered during the year driven by new projects and an increase in wallet share with existing customers. The company continues to gain market share from the fixed-tilt solar tracking devices. The company’s adjusted EBITDA surged 32% YoY benefited from the backward integration and efficient supply-chain measures. It had incurred one-time costs to the tune of $26.4 million towards streamlining processes with enterprise resource planning system implementation. Nevertheless, its net profit surged 49% over pcp to reach $59.1 million. ARRY had a $26.4 million increase in contingent consideration that relates to earn-out liability paid to its founder during the year.

In February 2021, ARRY completed the amendment of its credit facility which is expected to reduce interest outgo by ~$5 million in FY21. During the year, the company received $460 million from the term loan facility, in addition to $139.1 million from the IPO proceeds which was completed in October 2020. Much of these were utilized to pay special dividends of $589.0 million to its sponsors prior to the IPO. As of December 2020, ARRY had a cash balance of $108.4 million.

Top 10 Shareholders: The top 10 shareholders together form ~55.46% of the total shareholding. Fidelity Management & Research Company LLC and T. Rowe Price Associates, Inc. are holding a maximum stake in the company at 13.82% and 13.77%, respectively.

Figure 5. Top 10 Shareholders

Key Metrics: The company’s proprietary solar tracking systems continue to show market share gains from the traditional fixed-tilt trackers. The tangible effect on lower energy costs and increased energy throughput saw wider acceptance and helped to win new contracts. The federal government’s ITC grant on solar energy projects drove the sales volumes. Liquidity seems adequate supported by new order inflows, stable EBITDA generation, and moderate capex requirements.

Figure 6. Key Financial Metrics

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

Outlook: ARRY had contracts worth $705.3 million (executed and awarded) as of December 2020. Of which, $654.2 million is expected to recognize in FY21. The company is optimistic about healthy customer growth and increased awareness for axis-rotating tracker over the fixed-tilt solar tracker. Increased penetration in the underserved international markets and favourable US policy regulation to drive revenue growth of 23% YoY (midpoint guidance) in FY21. ARRY is expecting revenues in the range of $1,025 million to $1,125 million in FY21. Adjusted EBITDA is expected to be in the range of $164 million to $180 million. It is expecting adjusted net income per share in the range of $0.82 to $0.92.

Key Risks: ARRY had a high customer concentration with Lightsource Renewable Energy and Blattner Energy accounted for ~21.5% of total revenues in FY20. The company’s tracking device is fitted in ground-mounted solar panels which are highly seasonal based and are subject to climatic conditions. ARRY’s order backlogs are influenced by ITC credit norms which had declined from 30% erstwhile to 26% in 2020. The current ITC phases down to 22% for projects that begin construction in 2023 and then to a permanent level of 10% for projects that begin construction in 2024 and beyond. The phasing down of ITC credits may invariably affect the new projects and impact revenue. ARRY is exposed to the pricing of electricity by utilities. The decrease in electricity prices may affect the owners of solar energy projects and make the purchase less economical.  

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

EV to EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: ARRY has delivered 1-month and 3-month negative returns of ~14.41% and ~30.11%, respectively. The stock is trading below the average of the 52-week high price of $54.78 and 52-week low price of $26.13, implying accumulation opportunity. On the technical front, the stock has a support level of ~ US $28.168 and a resistance level of ~US $29.910. We have valued the stock using EV to EBITDA 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 as compared to its peer average EV/EBITDA (NTM Trading multiple) considering its healthy order backlogs, strong revenue growth projections for FY21 (+23% at midpoint guidance), leadership position in single axis-rotating gear drive solar tracker technology, and healthy EBITDA generation. For this purpose, we have taken peers such as Generac Holdings Inc. (NYSE: GNRC), Shoals Technologies Group Inc. (NASDAQ: SHLS), Bloom Energy Corp. (NYSE: BE), to name a few. Considering the robust revenue growth, healthy profitability, adequate funding flexibility, and strong ROE (higher than the industry median), we give a “Buy” recommendation on the stock at the current market price of US $29.290, up 3.61% on April 6, 2021.

ARRY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.