NEW YORK, Sept. 29, 2020 /PRNewswire/ -- Spruce Point Capital Management, LLC ("Spruce Point" or "we" or "us"), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a 91-page report entitled "Is There Really Something New Under The Sun?" that outlines why shares of Sunnova Energy International Inc. (NYSE: NOVA) ("Sunnova" or the "Company") face up to 80% downside risk. The full report can be downloaded and viewed at www.sprucepointcap.com. Follow us on Twitter @sprucepointcap for exclusive updates.
Based on extensive forensic analysis and a holistic review of Sunnova's accounting practices, financial controls and reporting, and corporate governance, Spruce Point has reached a clear conclusion: although the Company markets itself as a solar energy business, the reality is that Sunnova is a highly over-valued specialty finance business that lacks differentiated offerings and operates in a very competitive industry facing significant secular headwinds.
Notably, our research reveals that Chief Executive Officer William Berger's biography curiously omits his previous role at Enron Corporation ("Enron"), which was the early 2000s Wall Street darling known for its aggressive accounting and financial reporting, which ultimately led to a historic bankruptcy and fraud charges against the Chief Financial Officer. Additionally, we uncovered that Sunnova's Chief Financial Officer Robert Lane obscured his tenure at Madison Williams in public filings, a bankrupt energy broker-dealer backed by two dubious investors. A bankruptcy trustee later referred to one of Madison Williams' investors as having, "...many of the characteristics of a Ponzi scheme."1 Spruce Point finds it incredibly worrisome that under Mr. Berger and Mr. Lane, Sunnova's non-GAAP metrics employ highly aggressive and non-standard industry assumptions that we believe are similar to financial interpretations used by Enron. Shareholders should be particularly alarmed that Mr. Berger and Mr. Lane have attempted to conceal their connections to failed enterprises. We contend that such affiliations are highly germane to any investor's due diligence and assessment of Sunnova.
Unlike its peers, Sunnova reports Adjusted EBITDA – a metric we believe should not be used to evaluate a business dependent on consumer financing – and Gross Contracted Customer Value ("CCV") – a metric based on management estimates and negligible historical data. Spruce Point contends that investors need to have serious concerns about Sunnova's apparent misclassification of its own business, promotion of aggressive metrics and deteriorating margins.
Further, we believe current sell-side analysts do not properly categorize Sunnova as a specialty finance business, leaving investors with significant downside risk as the Company's optimistic price targets are a result of valuation metrics based on misguided financial measurements. The sum of these factors supports our conclusion – also shared by a former Sunnova executive and industry experts – that Sunnova has an undifferentiated and misunderstood business model. We believe the Company faces up to 80% downside risk to a single-digit share price.
A high-level overview of some of the detailed findings in Spruce Point's 91-page report includes:
- Sunnova's financial performance continues to decline as growth slows and margins erode. The Company relies on access to capital markets to support its unprofitable underlying business, which we believe will have serious repercussions as the balance sheet bloats. Equity shareholders could be left holding the bag as the economics of the business are stripped out by debt holders and tax equity investors. Spruce Point believes Sunnova is an overleveraged business dependent on management assumptions that will likely never generate cash flow for equity holders.
- William Berger, who brings an Enron pedigree to Sunnova, fosters poor corporate governance practices at the Company. Our research uncovered many concerning risks at the Company that we believe shareholders should be made aware of:
- Chief Financial Officer Robert Lane and Vice President of Finance Christian Hettick were previously executives at Spark Energy, another energy company that faced regulatory scrutiny during their respective tenures for fostering a poor business model that promoted high growth.
- Chief Financial Officer Robert Lane also obfuscated his three-year tenure at Madison Williams, a bankrupt energy broker-dealer backed by two dubious investors scrutinized by government regulators.
- Audit Chairman C. Park Shaper, who is currently selling stock, worked in senior management at Kinder Morgan (NYSE: KMI). While Mr. Shaper was CFO, Kinder Morgan received an informal Securities and Exchange Commission inquiry into its M&A accounting practices, and later settled a $27.5 million lawsuit to resolve investors' claims it inflated payouts by misclassifying expenses.
- Sunnova's largest shareholder, Energy Capital Partners ("ECP"), continues to liquidate its position, reducing its holdings by ~13% in July and ~24% in August at price levels 38% and 7% below current levels. Spruce Point believes that when the Company's lock-up expires on September 29, insiders are likely to follow ECP's lead and reduce their positions.
- Institutional Shareholder Services marked Sunnova as a high governance risk – a rating which evaluates audit practices, shareholder rights and executive compensation.
- Sunnova uses aggressive accounting and financial reporting. Management points investors to financial metrics like Adjusted EBITDA and CCV, which we believe are not an accurate proxy for free cash flow. Instead, these metrics deflect investors' focus from interest expense and financing costs critical to its business. In fact, CCV, the metric that relies heavily on management's 25+ year contract projections, is unaudited by PricewaterhouseCoopers. Sunnova has also engaged in aggressive inventory pre-purchases and uses the weighted average cost method for inventory accounting. We believe these tactics help it present its margins as higher than industry peers, which use more conservative practices.
- Solar industry headwinds will continue to inhibit Sunnova's growth. As solar systems become more affordable and the industry shifts away from 3rd party ownership to direct customer ownership, Sunnova's margins are highly vulnerable as the Company realizes 96% of its revenue from outside ownership. If Sunnova shifts a large part of its business to loans it will ultimately hurt its economics by cannibalizing its highly profitable solar renewable energy certificate revenue and losing investment tax credits. These headwinds are compounded by fierce competition as new entrants in the solar loan market (like Loanpal) continue to gain market share.
- Management fails to differentiate Sunnova from its competitors. Despite the Company's claims of a unique value proposition, we believe Sunnova has an undifferentiated business model and is ill-positioned in a highly competitive industry. Sunnova's "unique" business model falls flat as it boasts customer relationships, asset ownership and local dealer networks – all of which are no different than other players in the industry.
Spruce Point believes that Sunnova faces up to 80% downside risk once the market evaluates the Company for what it truly is: a specialty finance business that has been benefiting from investor euphoria for solar energy stocks.
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point's full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.sprucepointcap.com.
Spruce Point Capital has a short position in Sunnova Energy International Inc. (NYSE: NOVA) and stands to benefit if its share price falls.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
Spruce Point Capital Management
Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
1 Report: Fletcher fund like 'Ponzi scheme', New York Post (November 2013).
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