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AWN – a discounted entry into solar

How are my iPhone and my solar panels similar?

Imagine buying an iPhone factory at a discount. You wouldn’t hesitate. Especially if you could have bought the factory in 2009, before everyone had an iPhone.

The solar industry is in a similar state of early-stage mass-adoption – just ask Tony Seba

 

The iPhone was an adaptation of Alexander Graham Bell’s 1876 patented telephone. Similarly, the solar panels being built today are a culmination of decades of work.

The iPhone is a combination of touch-screen technology, sensors, software, mobile-internet access, exceptional marketing and the humble telephone. These technologies had been available for years before the iPhone was released, however the ability to mass-produce at significantly lower costs, enabled the iPhone to be accessible to the average user - and the rest is history.

Right now, solar is at a similar tipping point to where the iPhone was in 2007.

God Parity

That tipping point for solar is called ‘God Parity’. In short – it means it is now cheaper for home owners to buy solar panels and batteries (like Tesla Powerwall) than to hook up to the power grid.

As Tony Seba says, Australia reached God Parity in 2016.

The US won’t reach God Parity for a few years yet, which is why the opportunity to buy the ‘iPhone factory’ before the launch date is from Australia and easy for local investors.  

Trump Vs Solar

Solar technology and innovation has been ramping up in recent years, especially in the complementary area of power storage.

However, the US solar industry was shaken up when Trump was elected and proposed tariffs on imported solar panels under the guise of ‘making America great again’, through manufacturing of solar panels.

What effect will Trump’s tariffs have?

Trump likes coal, oil and fossil fuels - not solar.

If you think this sounds familiar, you’re right. Many Australian investors will recall Tony Abbott’s comments regarding the aesthetics of wind-power generation. The wind-power industry in Australia fell off a cliff because of these comments and was suddenly the worst place to be invested.

Abbott’s views didn’t stay those of the government for too long however and astute investors picked up on the tailwind (pun intended) when the Turnbull Government removed the Abbott restrictions in December 2015. The below chart of IFN.ASX, an Australian wind-power generation company, tells the story of the resulting market forces. The red arrow shows the impact when the Abbott policies were lifted:

Tariffs rarely work as intended. Look at the luxury car taxes on imported cars into Australia – Despite tariffs, Australians stopped buying Holdens and Fords a long time ago and even the Victoria Police have switched to German-made BMWs. Link

Furthermore, the increase in tariffs are supposed to protect jobs, particularly in the US solar panel manufacturing industry from cheaper, imported solar panels. However, this argument seems to be contentious as for 2018, the impact of the tariff is expected create 35,000 solar manufacturing jobs - but result in 48,000 to 63,000 job losses in the US solar installer’s and developer’s arena - hardly protecting jobs (source) https://www.greentechmedia.com/articles/read/trade-case-suniva-solarworld-final-arguments-commissioners-trump#gs.0HbGU20

Some analysts believe that the US-solar tariff debate will be a moot point for a variety of reasons:

  • Firstly, God-parity forces will be all-encompassing in the US and households won’t hesitate to pay the tariffs on importing their solar panels because they know that they will be more economical than hooking up to the grid.

  • Also, many analysts believe the tariffs will be fighting an incoming tide of innovation which is now driven by three industries, not just one. With the adoption of electric cars and the take-up of personal electronic devices, the centuries-old power generation industry is now working in unison with transportation and the personal electronics industries, for the most efficient storage of energy, of any source.

Considering God-parity requires low-cost solar panels and power storage for cloudy days and night-time, the solar power generation industry has thus entered the tipping point your smart phone met in 2007.

How to invest in US solar:

There are three obvious ways to invest in US solar but there’s one clear winner.

  • Individual technologies:

Like choosing between IBM and Apple, VHS or Beta – regardless of which is the superior technology, the choice is only clear in hindsight, so don’t buy a specific innovation (Beta), buy the concept (movies at home).

  • Energy providers:

In Australia, there are limited ways to invest purely in the solar industry. Most energy providers in Australia are diversified, so an investment in a company with green energies, like AGL, is dwarfed by their investment into coal/gas etc.

As for the green energy development space, projects are sparse given Australia’s limited size in comparison to the global energy consumption.

  • Buying directly into US solar companies.

To get access to the US solar-generation markets, Australian investors can buy Australian-owned Arowana (AWN) on the ASX. AWN is the parent company of their 2016 spin-off ‘Vivo Power’ (VVPR) – a Nasdaq-listed solar-power developer.

Many investors wonder why an Australian company would spin assets off onto the Nasdaq, especially when an ASX-listing is much easier.

VivoPower was listed on the NASDAQ as it is a global solar power company with majority of its project pipeline in the US. VVPR have teams in London and Sydney meaning the NASDAQ listing provided a greater leverage for global status and recognition.

AWN were the astute investors at the front of the pack, reaping the most rewards from the wind-power re-rating, selling IFN near the market highs and are still heavily invested in VVPR. The experiences of the political rhetoric of wind-turbines in Australia has placed AWN in a strong position of knowing how to invest and deal with the US solar tariff situation.

Solar certainly has political headwind in the US because Trump is looking to place a tariff on imported solar panels which are coming in ridiculously cheap from China.  As pointed out earlier, the tariff is unlikely to be excessive or it will defeat the sole purpose of protecting jobs.  

However, from an industry perspective, solar has a strong tail-wind, as energy from the sun is becoming cheaper to harness and is significantly cleaner.

As a solar developer, VivoPower is the fifth largest US solar developer with a US 1.8GW solar development pipeline. Looking back at Infigen (IFN.ASX) when politics were not in favour of windmills, there was little to no value attributed to Infigen’s development book.

The turning point in market sentiment towards IFN began when private analyst initiated coverage on the stock and the market began ascribing a value to its development pipeline. By the time mainstream brokers caught wind of the IFN valuation and shared their findings publicly, the discounts had been removed, re-rating had already occurred, and the majority of the gains realised.

Interestingly, in August 2016 Cannacord Genuity research valued IFN’s 1,100MW (1.1GW) pipeline of approved projects at AUD$165M. Note that VVPR has 1.8GW pipeline and a current market capitalisation of only AUD$ 57M (US$43M) – a significant discount.

It is highly likely that given the negative sentiment in the US solar market, VivoPower’s development pipeline is not being valued adequately.

Just like IFN during the Abbott debacle, VVPR’s market cap is well below their actual worth. highlighted best when looking at the different parts of the VVPR company and adding them all together – The below diagram compares the value of the parts against the current market valuations. The company recently provided a sum of parts valuation in their half year result.


Why AWN.ASX and NASDAQ: VVPR and why are they trading at a discount?

Comparing VVPR to their US peers, VVPR is the greatest discount, possibly because they listed on the NASDAQ just as Trump was waging war on solar. With that timing, they were not able to rally long-term, passionate investors like their peers did in the years prior.

With the known political hurdles ahead, AWN is viewed as a moderate-risk, highly leveraged green play, specifically solar, into the US markets on the cusp of their upcoming God-parity – just like buying that iPhone factory back in 2006.


by 

Christopher Hall

Market Strategist

Arrow Securities Group