Company Overview: Sunrun Inc. (NASDAQ: RUN) provides rooftop solar and battery storage solutions to residential homeowners. The company caters to 500,000 customers in 22 states covering the United States, DC, and Puerto Rico. Through its rechargeable BrightBox battery systems, RUN powered several homes during grid outages seen in California and NorthEastern US for ~7,500 hours owing to hurricane and wildfire incidents in 2020. Besides solar power systems and product sales, the company also derives revenues from the sale of solar power to residential customers on a contract basis (power purchase agreements) for a period ranging from 20-25 years.

RUN Details

A Leader in Residential Solar Energy Systems: Sunrun pioneered the residential solar service in 2007 and it became the market leader with a cumulative installed capacity of ~2,272 MW as of September 2020. Residential solar just reached 3% of the US single homes giving adequate headroom for Sunrun to explore and grow. With increasing mandates from the government and declining installation cost of solar panels and batteries, market penetration for residential solar products is expected to reach 13% in the US by 2030.

Figure 1. With Cost of Batteries at ~$150/Kwh, Penetration of Residential Solar Peaked:

Source: Company reports

Solar rooftop and battery solutions yielded savings of 5%-45% in the first year of installation to customers. With this, RUN delivered about $300 million in savings to customers in their billings as compared to traditional utility services. With the average price of ~$0.136 KWhr per unit, its PPA customers particularly in California and Massachusetts experienced more savings.

Figure 2. Solar Plus Storage Brings Higher Savings Over the Utility Bill:

Source: Company reports

Sunrun provides solar energy to customers through long-term contracts (power purchase agreements). Customer agreements and incentives accounted for 53% of revenue during nine months ending Sep’20 (vs. 45% in FY19). These contracts range from 20-25 years and are fixed price in nature. It gets renewed every year and customers are given an option to pre-pay for the entire term as well. The company monetizes these revenue-generating assets by pooling them and creating investment funds. It had about 35 active investment funds as of September 2020. Its receivables asset portfolio reflected healthy repayment history. Sunrun had collected ~99% of its cumulative billings as of November 2020. Sunrun passes federal benefits such as investment tax credits, accelerated depreciation, etc. to the investors of such funds.

Sunrun reported an increase in customer billing value to $4.41 per watt in Q3 FY20, but NPV deteriorated to $0.86 per watt due to an increase in creation costs (at $3.55 per watt in Q3 FY20 vs. $3.22 per watt in FY19). The surge in installation costs, as well as higher spend on sales & marketing, led to an increase in creation costs. Net future cash flow streams from assets deployed in Q3 FY20 stood at ~$1.66 billion, an increase from $1.52 billion reported in FY19.

Figure 3. Receivables Portfolio Provides Financing Flexibility Through Securitization:

Source: Company reports

Acquisition of Vivint Solar:

Sunrun completed the acquisition of Vivint Solar in October 2020. Vivint operates as a full-service residential solar provider in the United States. The transaction is closed at an estimated value of $5.0 billion. Vivint becomes the wholly-owned subsidiary of Sunrun. Sunrun to realize cost synergies totalling $90 million on an annual basis. Over 95% of customers of both companies are located in close proximity providing operational benefits for supply-chain and procurement. Solar plus storage asset base to increase taking the Sunrun to become a top 3 owner of solar assets in the US with a combined capacity of 3,028 MW next to NextEra and Tesla.   

Figure 4. Sunrun Reported Pro Forma Revenues of $904.92 million in YTD Sep’20:

Source: Company reports

Historical Financial Trend:

With depleting fossil fuels and incidents such as hurricanes and wildfires, electricity through solar systems and batteries earned prevalence. Revenue showed an upward trend benefitting from increased penetration of residential solar in markets like Hawaii at 31% and California at 13%. As battery costs declined, consumers increasingly deploying batteries to their solar systems. Like, Sunrun experienced 5% of its new customers in Bay Area added Brightbox battery to their solar systems. This was at 35% in California and it approached 20% across all geographies. Sunrun is ramping-up its solar and battery systems at stores in 22 states through tie-ups with Home Depot and Costco.

Figure 5. Five-Year Financial Trend of Sunrun:

Source: Company reports

RUN experienced a 4% drop in customer agreement and incentive revenues in FY19 over pcp due to the sale of commercial tax credits under a fund opened in 2018 with pass-through activity commenced in the second quarter of 2019. Increased wholesale volumes and strong pull from retail store partners drove solar energy products sales. The company was able to bring down installation costs due to scale economies. But this was offset by a spike in expenses towards new retail store partnerships and increased investments in advanced energy service capabilities. Nevertheless, Sunrun reported a net profit of $26.33 million attributable to common shareholders in FY19.

Figure 6. FY19 Key Financial Highlights:

Source: Company reports

Q3 FY20 Updates:

Acquisition of Vivint boosted performance in Q3 FY20 with over 500,000 customers. The company installed ~109 MW of solar energy systems during the quarter. RUN opened the sales of Brightbox to all customers and across geographies. The sales attachment rate of its battery hits a record high with more than 45% compared to the prior year. Sunrun is active in virtual power plant – it had awarded 11 projects as of September 2020. As announced in November 2020, the company forged a 10-year contract with Southern California Edison which will unlock incremental recurring revenues for providing virtual power plant services to the grid.

RUN reported a net loss of $4.07 million attributable to common shareholders during the nine months ending September 2020 due to an increase in customer creation costs led by the integration of Vivint and costs related to customer agreements and incentives. The management is expecting net customer margin to accelerate in FY21.

Figure 7. Increase in Creation Costs Pulled Down Net Customer Margins in Q3 FY20:

Source: Company reports

The preliminary earnings estimates for Q4 FY20 divulges that RUN installed ~171.6 MW of solar energy, an increase of 10% on a QoQ basis in Q4 FY20. The acquisition of Vivint translated to increase customer addition to 550,000 as of December 2020. Net earnings assets improved to $2.90 billion (up from $1.65 billion in Q3 FY20). The cash balance improved to $708.0 million (including restricted cash) as compared to $657.6 million in September 2020. Total debt surged to $5.1 billion as of December 2020.

Top 10 Shareholders: The top 10 shareholders together form ~49.71% of the total shareholding. The Blackstone Group and Coatue Management, L.L.C. are holding a maximum stake in the company at 12.30% and 8.94%, respectively.

Figure 8. Top 10 Shareholders

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: RUN reported healthy revenue growth aided by increased adaption of solar energy systems and ramp-up of sales to reach through tie-ups with retail stores. Lower creation costs including the cost of installation helped to boost gross margin. Healthy portfolio collection and offtake by investors benefited customer arrangement segment revenues. RUN had an adequate cash balance driven by recurring revenue streams and recourse debt financing.

Figure 9. Key Financial Metrics

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

Outlook: With an increase in capex by utility operators and stagnant demand, retail electricity prices are expected to increase over the next 10 years. Further, the cost of solar panels to decline by 34% and batteries by 64% over the next 10 years as mentioned in the company report. This may provide strong demand for solar energy systems and batteries going forward. RUN is well-placed to accommodate the incremental demand. Increased regulatory mandates also pushed energy through alternative sources. Like, the California Energy Commission mandated solar panels in every new home starting from 2020. This saw ~150,000 new residential solar customers added in California. RUN had restructured its sales and distribution with the acquisition of Vivint. The management is expecting cost improvements to drive net customer margins in FY21. Sunrun has proposed to raise $350 million convertible senior notes maturing 2026. The company is expecting to use the proceeds to part pay existing debt and to fund potential acquisitions.

Key Risks: RUN is exposed to regulatory risk. Reduction in investment tax credits and accelerated depreciation program by the government may affect revenues and subsequent pass-through to investors.  Increase in import tariffs from China to inflate material costs and affect margins. The ongoing trade tension may deviate the cost synergies and complicate procurement. RUN competes with utility companies – rates charged by traditional utility companies may influence the pricing and affect margin. RUN has a significant geographic concentration risk with ~40% of customers were in California. Net metering policies allowed homeowners to export excess electricity to the national grid for credits. This may influence the billing value and revenue of RUN.

Valuation Methodology: Enterprise Value 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: RUN has delivered 3-month and 6-month returns of ~+31.89% and ~63.57%, respectively. The stock is trading higher than the average of the 52-week high price of $100.93 and 52-week low price of $7.83. On the technical front, the stock has a support level of ~US$63.81 and a resistance level of US$87.43. 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 slight discount as compared to its peer average EV/Sales (NTM Trading multiple) considering its net losses in Q3 FY20, elevated debt profile, while also taking into account its historical premium trading multiple versus peers. For this purpose, we have taken peers like CleanSpark Inc. (NASDAQ: CLSK), Enphase Energy Inc. (NASDAQ: ENPH), Solaredge Technologies Inc. (NASDAQ: SEDG), to name a few. Considering the rapidly growing revenues following the increase in penetration of residential solar systems, adequate cash balance, financing flexibility with leasing assets, and recent announcement to raise convertible senior notes for $350 million, we give a “Buy” recommendation on the stock at the current market price of US$71.220, up 1.92% on February 2, 2021.

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

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