Spark Power Group Inc

Spark Power Group Inc (TSX: SPG) is independent provider of end-to-end electrical contracting, operations and maintenance services, and energy sustainability solutions to the industrial, commercial, utility, and renewable asset markets across North America. 

Key highlights

• Awarded three new solar projects: The company recently teamed up with GP JOULE, a worldwide renewable energy company, to build three new solar power projects in Western Canada with a combined capacity of 70 MW. For the substation connectivity parts of each project, Spark power would offer complete engineering, procurement, and construction assistance, as well as electrical house supply and commissioning scope. Construction on the substation would begin in the fall of 2021, with the final project expected to be completed in early 2022. We believe this is a great opportunity for Spark Power to expand its solar power services in Alberta.
  

• Experiencing positive signs of revival: The company is seeing increased new bookings in FY2021, which is being aided by better business circumstances. Revenues, new bookings, and consumer engagement are projected to remain robust in FY2021, with the management anticipating higher margins owing to decreased COVID-19 protocol expenses.
  

• Solid growth from renewables segment: Thanks to the recent acquisitions of 3-Phase and One Wind, as well as strong demand for its U.S. wind services, the company experienced a large rise in revenue from the renewable business in FY2020, and the trend continued in Q1 2021, accounting for over 30% of total revenue. Additionally, the company's green segment serves fast-growing sectors including Battery Energy Storage Systems (BESS) and Electric Vehicles (EVs), which is a big benefit. We expect the trend to continue in the coming days, strengthening the company's cash flows.

• Utilizing customer database for organic growth: Recently, the company announced that current and established consumers in California would be able to take advantage of solar technologies. To meet the rising demands of the solar market, the organization is focused on leveraging its local footprint and customer partnerships, as well as its technological and sustainability capabilities.

Financial overview of Q1 2021 (in thousands of Canadian dollars)

Source: Company

• In Q1 2021, the company’s revenue increased 4.7% to CAD 56.0 million, against CAD 53.5 million in the previous corresponding period. The group reported higher revenues from renewables segments, which accounted for over 30% of total revenue in the first quarter.
• Gross profit stood higher at CAD 14.1 million compared to CAD 13.3 million in pcp, supported by a higher income.
• Income from operations improved and stood at CAD 1.4 million, against a loss of CAD 0.05 million in Q1 2020, primarily attributable to decrease in selling, general and administrative costs at CAD 12.5 million V/s CAD 13.3 million and positive change in fair value of derivative instruments.
• The company minimized its comprehensive losses to CAD 0.07 million compared to a loss of CAD 2.3 million in pcp.
  

Risk associated with investments

The company reported a surge in its total debt due to working capital requirements, capital expenditures and debt service requirements. Continuation of the above trend would lead to higher finance costs, which would further dampen the company’s profitability. 

Stock Recommendation

Despite the challenges posed by the COVID-19 pandemic, the company achieved sales growth of more than 26.8%, in its renewables market segment leading the way in Q1 2021. Thanks to the increasing introduction of green energy, the renewables segment is expected to continue to expand in the coming days. Furthermore, the company's new approach of leveraging its current market footprint and customer partnerships in California is expected to help the company expand organically. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ Rating on the stock at the closing price of CAD 2.06 on July 20, 2021, with lower double digit (in percentage terms) upside potential.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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