A-Power Showing Signs of Strength

Jan 12, 2009
Author: Administrator


A-Power (Nasdaq: APWR) is showing strength this morning on the heels of its announcement that it signed an LOI with GE Drivetrain Technologies whereby GE will supply APWR with 2.7MW wind turbine gearboxes and also for the two companies to form a JV partnership for a wind turbine gearbox assembly plant.

Under the agreement GE is supplying A-Power with more than 900 2.7MW gearboxes beginning in 2010 - a signal that APWR's business outlook looks pretty bullish. We have commented lately that the stock has been discounted heavily based on an obvious lack of credibility it has with the Street. Today's endorsement from GE Drivetrain's Preston Logan spoke to the "speed and focus" with which A-Power has built its wind turbine business and that fact that GE is partnering with A-Power on an assembly plant to serve the Asian markets is significant.

We have been outspoken in our opinion that A-Power's stock has been way oversold lately and today's announcement should provide some much needed support in the current volatile markets.

Gearboxes are generally the second most expensive component of a wind turbine, representing about 13.4% on average of the total cost. Wind turbines (three) represent 16.6% of the total cost on average. In November, Cleantech reported that there is an expected shortfall of about 5GW of gearboxes this year relative to the demand for turbines (during the last 10 years, turbine demand has increased at a rate of about 46% annually).

China has the largest wind turbine manufacturing industry in the world, and accounts for about 56% of wind equipment installed globally in 2007 (Global Wind Energy Council). And the domestic markets will continue to drive this growth for the foreseeable future. In 2008, installed wind capacity in China was about 7.5GW and this is expected to increase to as much as 100GW by 2020 making it the largest wind market in the world - by far.

A-Power is poised for strong growth, having entered into the wind turbine manufacturing business this past year, leveraging a licensing agreement from Furhlander. In just a short period of time, the company has built a pipeline of about 380 or so turbines, and a backlog based on closing sales of 50 turbines of about $150 to $200 million.

The Company has been able to leverage is distributed power energy business to expand into the wind energy business without requiring additional debt or equity financing, using its existing cash-flow. Its backlog in this part of its business is more than $800 million.

The stock is currently trading at $5.73 in intraday, representing a market cap of about $193 million, or 0.74x our FY08 estimates of $260.4 million in revenue and 8.25x our estimates of $23.4 million in earnings. We think that, based on today's announcement which should provide some much needed credibility into the business and confidence in the outlook for the company, multiples of 1.5x sales and 12x earnings are reasonable, which would imply raising our target trading range for the stock from $6.90 to$7.60 based on a 1x sales and 10x FY08 earnings ratio to a range of $8 to $11.50.

In our last commentary on A-Power , we had adjusted our target income for FY09 down by 30% to $49 million. Based on this morning's revised target stock trading range to $8 to $11, this would put the stock trading at a P/E range of 5.75x to 7.97x earnings, which, in our opinion, are conservative.

Our adjusted 2009 target trading range: $8 to $11.50

Important Disclosure: SCPEditor is LONG APWR. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.




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