- Energy efficiency services, like solar power, are on the rise in the U.S. Large companies like First Solar (FSLR) performing after years of languishing as solar economics improve for Americans
- Few investors paying attention to small-cap Solbright Group (SBRT), which has seen soaring revenue in recent quarters, up 750% year over year in last reported quarter, with positive cash flow in first 6 months after closing solar acquisition. SBRT could be worth 60% to 400% more based on a look at peers in the space, and with the right execution
In the summer of 2017, Solbright Group (SBRT) made a savvy decision to tuck in a mid-size, mid-Atlantic photovoltaic (solar) installation company, which has been paying off in terms of revenue generation in just the first six months after. This little-known company reported a 750% revenue increase in their second quarter of fiscal 2018, ending Nov 30, 2017, over the year-ago quarter, an impressive bump for a company of this size. The company even reported positive cash flow in the six months after the acquisition, an impressive feat so rapidly after a possibly transformative M&A event.
Solbright Group's business is saving businesses money by improving energy efficiency for large, high-value facilities and infrastructure projects, through installation services, hardware, and even software - the solar installer acquisition was a no-brainer tie-in, and SBRT could be set to reap the benefits in 2018 and 2019. With this acquisition complete and in the Solbright wheelhouse, the business is going through a unique transformation that has yet to be recognized by the public markets. Solbright Group's service business, which includes the now-integreated solar installation business, sets up a funnel of potential business for their high-margin software business, where the company leases and manages a SAAS networking and hardware package to large facilities, with significant potential recurring revenue. The solar installation business serves as a source of very warm leads for the bigger cash flow opportunity. 2018 is set up to be a potentially banner year with 200% to 400% of possible upside based on peer analysis.
Financials Tracking in Right Direction, 2018 and 2019 Could Be Even Bigger
Solbright Group's core competency lies in improving energy efficiency for large, high-value facilities and infrastructure projects. Through the company's energy conservation services subsidiary SES, Solbright provides energy conservation services to commercial operators and buildings throughout the eastern United States, including energy consumption assessments and recommendations, as well as acting as the general contractor for light-emitting diode retrofits, oil-to-natural gas boiler conversions, and solar panel installations, to name a few.
These services pair with the other side of their business, called Arktic, the company's proprietary scalable and interoperable cloud-based software system for sensing, gathering, storing and analyzing data energy usage data in these same facilities. This so-called "Industrial Internet of Things" application consists of pairing the hardware/gating technology with the company's tailored package, for to measure and ultimately reduce energy usage and costs. For a recurring fee, facilities continue to improve energy consumption--and cost-savings--generating ongoing income for Solbright Group. It's a win-win for the company and their clients, who can save money on their energy consumption.
Solar and energy efficiency services are on the rise in the U.S., evidenced by recent performance from companies like First Solar, Inc.(NASDAQ:FSLR). According to the Solar Energy Industries Association (SEIA), solar has experienced an average annual growth rate of 68%, and nearly 250,000 Americans now work in the industry in some capacity ( more than the coal industry). The cost to install solar has dropped by more than 70% since 2010.
Demand is up as the economics improve for the average American and many businesses. In the summer of 2017, Solbright Group significantly expanded their own solar installation offerings with the acquisition of another mid-sized photovoltaic installer, which brought with it $40 million in reported backlogged revenue potential.
Solbright's business is already generating meaningful revenue for such a small business, and with the addition of its new solar installation business last summer, the company could be on track for $12 to $20 million in annual revenue based on last quarter. In the fiscal second quarter of 2018 (ended Nov 30, 2017), Solbright reported an impressive 750% revenue growth, to $3,291,100,over the same period the previous year. The company even reported positive cash flow for the 6 months since the acquisition, meaning that the internalization has gone well and the company is maintaining a positive trajectory.
What sets this acquisition apart is the intrinsic business opportunity that accompanies increased solar installation projects - the opportunity to sell further services (lighting retrofits, for example) as well as continued used of the company's software platform. This is key to understanding SBRT, as the software component should generate exceptional margins in the 80-90% range, compared to 10-30% for most contracting projects.
The Right Execution Could Launch SBRT Into Massive Growth
Solbright's business is unique in that they combine solar photovoltaic installs with efficiency improvements and smart networks to enhance a facility's efficiency, with a proprietary software (SAAS) platform. Vivint Solar (VSLR) trades on the New York Stock Exchange and installs/maintains residential and commercial photovoltaic projects, like Solbright. At a $350 million market capitalization, investors have valued this company at a 1.6X Price/Sales multiple based on $243 million in sales over the trailing twelve months (TTM). Green & Renewable Energy companies more broadly carry an average Price-to-sales ratio of 4.4 according to NYU Stern.
The same metrics applied to SBRT demonstrate just how under-the-radar this opportunity is. Solbright is on track to have sales of around $15-18 million in their fiscal 2018 based on $8.6M so far in the year. A 1.6 to 4.4x Price/Sales multiple could mean a fair value market capitalization based on this 2018 estimate of $24 to $79 million depending where revenue comes in.
Today, the company is valued at $15 million, demonstrating that with no growth from current quarterly revenues SBRT could be due for a move higher by 60% to 400% just to reach fair value! This valuation metric may even be conservative based on the company's more unique business model, which should blossom in the coming 12-24 months.
As the newly combined Solbright Group onboards new solar projects, more SAAS opportunities will emerge. Just $1 million in revenue from this side of the business could generate $900,000 in recurring annual gross profits considering the low-to-non-existent cost of sales for this segment, meaning that overall margins at SBRT improve with time and penetration of this burgeoning market opportunity.
As a microcap company, Solbright may have a harder time raising additional funds for further capital investments. Contracting/construction businesses tend to have fairly low profit margins, making overall profitability harder to achieve. The market is crowding, and the company will face strong headwinds in the competition for new contracts. Solbright is not without risks as an investment, and micro-cap companies are often worthless in the long-run.
Not all large cap energy companies will weather the coming changes to energy use in the U.S., like Chesapeake Energy Corporation (NYSE: CHK) which has struggled for the last two years. Smaller up and coming companies like Solbright can make for a good high-risk high-reward portfolio addition, especially as the company sees its recent acquisition reflected in the income statement in 2018. Trading to reflect other companies in the public realms could suggest 60% to 400% of upside.
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