Integrated Solar Rooftop: Merger and Acquisition Could Drive Share Price Rise (OTCMKTS:SIRC)
Solar Integrated Roofing Corporation (OTCPK:SIRC) is growing through acquisitions at a rapid pace. If management receives sufficient funds from investors and the acquisitions do not fail, sales growth could remain above 20% year-on-year. Assuming Solar Integrated reaches the size of the competitors, in my opinion the EBITDA margin will increase as the economies of scale increase. In the best-case scenario, the fair price could be significantly higher than the current stock price. I see some risks from impairment of goodwill, intangible assets and potential dilution of equity. So the stock isn’t for everyone, but I’m a buyer.
Solar Integrated Roof
Solar Integrated Roofing Corporation is a single-source solar power installation and roofing systems company. The company is attempting to build a diversified portfolio of assets in solar, battery backup, electric vehicle charging, roofing and related HVAC/electrical contracts.
The most attractive feature of Solar Integrated is management’s ability to acquire other competitors. The number of acquisitions signed over the past two years is overwhelming, which I think most financial advisors will likely appreciate. Keep in mind that the company will likely experience significant revenue growth through inorganic growth.
As a result of Solar’s mergers and acquisitions activity, its number of installations per state has increased significantly in 2021 and 2020. In my opinion, the company hasn’t really installed new systems, but acquired new ones . Either way, most investors will be interested in Solar Integrated because it is seeing significant sales growth.
In the nine months ended Nov. 30, 2021, Solar reported revenue of $66.1 million, nearly 400% higher than the same period in 2020. Gross profit also increased a little, and the amount of wages and salaries more than doubled. . Already with a positive net result, I think the demand for the title could increase from 2022.
The figures reported from 2017 to 2020 have been quite detrimental. The company not only reported negative EBITDA margin and negative net profit, the total sales amount was also quite low. That’s why I think the stock is currently trading a bit undervalued. Many investors may not be looking at the new numbers because the old numbers weren’t that encouraging.
If Solar Integrated grows like the solar rooftop market, the implied fair price could reach $1.1
At best, I assumed that Solar would continue to grow its core business through M&A transactions. I believe management will gain economies of scale and EBITDA margin will likely increase. Keep in mind that I assume Solar will acquire businesses at decent EV/EBITDA multiples. If Solar Integrated buys private companies at 5x-9x EBITDA and trades at 11x like other big competitors, management will likely return a decent ROE.
In addition, I would also expect management to continue expanding into the electric vehicle industry. Note that Solar has promised to complete the acquisition of LA EV Charging, which includes contracts worth almost $100 million. If management also signals the construction of 20MW of microgrid opportunities and new investments in the C&I market, FCF expectations will likely rise.
In this scenario, I evaluated the market growth and profitability ratio of other competitors. In my opinion, if Solar becomes a major player, the EBITDA margin and FCF/Sales ratio will likely resemble those of other competitors.
Solar rooftop market growth is expected to be close to 20%, so I would say Solar could grow 20% YoY:
According to a comprehensive research report by Market Research Future (MRFR), Solar Rooftop Market Information Report by Capacity (>10 kW, 11 kW- 100kW and
Competitors are also reporting an EBITDA margin of 3% to 24%, so I’d say going forward, Solar’s EBITDA margin could be close to those numbers.
With sales growth approaching 20% to 17% from 2022 to 2029 and an EBITDA margin of 2% to 15%, the 2029 NOPAT could be $34 million and 2029 revenue could be around $335 million.
Currently, competitors are reporting an FCF/CA ratio close to 15% and -13%. However, in the past, some competitors even posted an FCF/CA ratio close to 40%. I try to be very conservative, but let’s say we could see an impressive FCF margin in the coming years.
With a conservative D&A, changes in working capital and investments/sales close to 4% to 5%, the FCF would increase from $6 million to $47 million. Under my assumptions, I got FCF/CA of 14%.
Assuming a WACC of 7.6%, the discounted sum of future FCF should be close to $143 million. With an exit multiple of 11x, the present terminal value would be $331 million and the implied stock price would be $1.1.
Risks: Failed acquisitions and impairment of goodwill could lead to a decline in share price
With management initiating numerous transactions, in my opinion, it is likely that one or more acquisitions will not work out. In the worst case, the accountants could be required to write down certain intangible assets or goodwill, which would lead to a reduction in the book value per share. If financial analysts lower their free cash flow expectations, the fair value of the business could drop significantly. As a result, I think the stock price would go down:
Tangible and intangible fixed assets are valued at each closing date to detect signs that an asset may have been subject to impairment. If such an indication exists, or when an annual impairment test of an asset is required, the Company estimates the recoverable value of the asset. The recoverable amount of the asset is the higher of the fair value of an asset or cash-generating unit less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Source: 10-Q
In the last annual report, I was able to read very prejudicial language about the financial situation of the company. The current environment is slightly better than when the annual report was produced. With this, some risks are always present. If management cannot obtain sufficient financing to acquire more competitors as well as to install more solar panels, sales growth may decline. As a result, management may suffer from a lack of demand, which can lead to a drop in the company’s total valuation:
If the Company is unable to obtain additional funds when required or if funds cannot be obtained on favorable terms, management may be required to restructure the Company or cease operations. The financial statements do not include any adjustments that may result from the resolution of these uncertainties. Source: 10-k
With the solar rooftop market growing over 20% year-over-year, I think assuming 5% sales growth is pretty pessimistic. Under these conditions, sales in 2029 would remain close to $150 million. I also assumed an EBITDA margin of 7.75% and an effective tax of 22%.
In this scenario, I also assumed a D&A of $2 million, changes in accounts receivable $4-6, and changes in accounts payable $5-10 million. Finally, with a capex/sales ratio of 5%, free cash flow should increase from $5 million to nearly $10 million:
If we add the future free cash flow with a WACC of 10%, the net present value is $33 million. I also used an exit multiple of 10x, which implied a terminal value of almost $115 million. Discounting both the terminal value and future FCF, and dividing by the number of shares, Solar’s stock price equals $0.3.
The total amount of assets increased a little
As of November 30, 2021, Solar declared $1.4 million in cash, which is significantly lower than February 2021. The company has invested a lot of money in acquiring other companies, which has resulted in a dramatic increase in the total amount of assets. and goodwill. If the book value per share and the balance sheet continue to grow at this rate, in my opinion, many investors will probably study the business model of the company.
Solar Integrated appears to be financing some of the acquisitions with a combination of convertible notes, related party debt and notes payable. I’m a bit concerned about the equity dilution risk associated with convertible debt. With that, if future free cash flow is sufficient to pay for the dilution effect and debt obligations, I wouldn’t expect significant downward pressure on the stock price.
If Solar Integrated Roofing continues to acquire smaller competitors and grows with the solar rooftop market, the stock price could move north. In my opinion, the current market price does not represent the potential profitability that shareholders could soon enjoy.
With this, there are also risks. If management is unable to attract new investors and does not secure financing, sales growth may decline significantly. Considering the fact that you need tons of cash to buy other companies, if some of the acquisitions fail, the book value per share could drop as well. I remain a stock buyer, but investors need to perform significant due diligence. Stock is not for everyone.