TerraForm: Entering Emerging Markets With An Open Mind

• Shares of TerraForm Global, Inc. GLBL have risen almost eight percent over the last five days of trading.
• Macquarie’s Angie Storozynski has initiated coverage of TerraForm Global with an Outperform rating and price target of $17.
• Storozynski believes that while there is no dearth of growth projects for the company, Fx, country and regulatory risks, as well as interest rate risks will prove vital to its long term value creation.

The company’s sponsor, Sunedison, Inc. SUNE, and its sister company, TerraForm Power, Inc. TERP, have already proven their ability “to develop and acquire solar and wind projects at attractive economics,” according to the Macquarie report.

While TerraForm Global is for now an emerging markets’ yieldco, it would need to “front-end load” growth, given that the financial markets are not yet open to yieldco equity offerings, “especially from an MLP-like structure focused on emerging markets,” Storozynski mentioned.

However, given the size of TerraForm Global’s target markets and their renewable obligations, the company is unlikely to see any lack of growth projects. In addition, Fx, interest rate and regulatory risks are unlikely to surface for the next 12-24 months.

Although Storozynski believes that the company would be able to find contracted solar, wind and hydro projects, its ability to meet the DPS CAGR target of 20 percent beyond 2016 would depend on the “cost of and access to equity and debt financing.”

On the other hand, Storozynski does not expect TerraForm Global’s 2016 dividend yield of 13.6 percent to be sustainable and expects SunEdison to “adjust the pricing of its project drop downs into GLBL, allowing GLBL to earn a stable spread between its higher cost of financing and project returns.”

However, Storozynski also expressed concern regarding the impact of political cycles in the company’s core geographies on the stock.