Abengoa, S.A. BUY Target $44

ABGB : NASDAQ : US$26.14
ABG : MCE
BUY 
Target: US$44.00

COMPANY DESCRIPTION:
Abengoa is a leading provider of technology and
innovation to sustainability markets worldwide. With a
platform focused on E&C, concessions and industrial
products, the company has built a strong and growing
presence in solar and biofuels production, T&D lines,
water desalination, recycling and IT-related end markets.
Sustainability — Energy & Power Technologies
YIELD ADDS LOTS TO THE APPEAL;
REITERATE BUY, TARGET TO $44
Investment recommendation
We expect Abengoa to be a strong performer in 2014 as the story
becomes better understood by US investors (post IPO) and asset-based
concession models continue to be attractive (e.g., inflation hedge,
recurring revenues, dividend streams) for investors.
Investment highlights
 We are updating our valuation following successful completion of
the Abengoa Yield IPO (see our separate initiation on Abengoa
Yield). Now that the Street (and us) can begin to “mark to market”
the concession portfolio, we expect a notable increase in the value of
Abengoa shares. We offer a sum-of-the-parts analysis below.
 Back to biz: E&C backlog trends look to stay strong, including the
recent award of a large water deal in Texas and a desalination plant
in Chile. For biofuels, crush spreads remain favorable (though RFS
mid-term overhang remains), while Europe remains weaker.
 Looking forward, we view the goal of positive FCF (corporate level)
in 2014 as very achievable, while a debt re-rating also looms as a
potential catalyst (enabling accretive refinancing).
Valuation
Our new $44 target on NASDAQ shares (~€6.52 on Madrid B’s)
represents 9.6x 2015E EV/EBITDA (from 7.9x). This takes into account
the 5:1 ADS-to-Madrid B share conversion and a EUR/USD FX rate of
1.35.
Risks
Balance sheet leverage, commodity volatility, energy-related subsidies,
concentration of ownership and share liquidity are among the risks.

Renewable Energy Group

REGI : NASDAQ : US$10.07
HOLD 
Target: US$14.00

COMPANY DESCRIPTION:
Renewable Energy Group is the largest producer of
biodiesel in the United States. As a fully integrated
producer, Renewable Energy’s capabilities include
feedstock acquisition, facility construction management,
facility operations and biodiesel marketing.

Sustainability — Bioresources
DYNAMIC DEVELOPMENTS
Investment recommendation
While we expect shares to remain volatile given the commodity-driven
economics, we stay constructive. Near term, focus turns to M&A
integration and related strategy, particularly given RFS dynamics and
tough biodiesel comps in 2014.
Investment highlights
 With Syntroleum shareholder approval secured on June 3, REGI has
acquired 50% of Dynamic Fuels and its 75M gpy renewable diesel
biorefinery in Geismaer, Louisiana (contingent agreement for Tyson’s
50% share of the venture expected to close by year-end). In
connection with the transaction, REGI has also issued $143.75M of
2019 convertible notes (2.75%), generating net proceeds of ~$130M.
 We like the deal, as management’s track record of execution is
impressive and we expect lots of developments over the next 12+
months. Longer-term strategic plans are progressing nicely, with the
prior acquisition of LS9 serving as the cornerstone for the new REG
Life Sciences business (as REGI pursues renewable chemicals and
other advanced biofuels with potential higher margin opportunities).
 Our numbers adjust for the new notes and Syntroleum share
issuance (~3.49M), though do not yet reflect incremental
overhead/capex (will change again upon close of Tyson deal). Our
revenue/adjusted EBITDA estimates are unchanged, while ‘14E EPS
goes to $(0.31) from ($0.29) and ‘15E goes to $$0.29 (from $0.40).
Valuation
We derive our $14 target by applying a 7.5x EV/EBITDA multiple to our
’15E adjusted EBITDA of $58M.
Risks: Commodity price movements, future financing needs, project
execution

Fuel Tech

FTEK

NASDAQ : US$5.69
HOLD  Target: US$6.00

COMPANY DESCRIPTION

Fuel Tech is a leading company engaged in the development, commercialization, and application of proprietary technologies for air pollution control, utility process optimization and advanced engineering services

Sustainability — Energy & Power Technologies

FUELING A FUTURE FOUNDATION; MAINTAIN HOLD, $6.00 TARGET

Investment recommendation

Underlying profitability likely helps keep share price firm here, while we look for improving demand and the intro of new solutions in ’14+. Maintain HOLD, $6.00 target.    Investment highlights  Management’s focus on geographic expansion and product diversification stays firmly intact, supported by a very healthy balance sheet (~$26M net cash). FTEK continues to manage admirably through a difficult domestic environment (2+ years regulatory gridlock, shift towards nat gas generation), as attention turns to a potential Supreme Court decision in the Q3 timeframe.
 Q4 results were lower than expected, as impressive international APC growth could not offset domestic softness (expected to persist into H1/14). FUEL CHEM continues to hold steady, while APC backlog ticks down sequentially (~$26.7M currently, including ~$9.5M remaining on Chilean project). The project pipeline stays encouraging (esp. China), while sales cycles remain long and lumpy.
 Our 2014 estimates go to $113.5M/$0.20 from $119M/$0.25 (including higher taxes), while 2015 is introduced at $119.5M/$0.22. Valuation Our $6 target is based on a 0.9x EV/sales multiple applied to our ‘15 revenue estimate of $119.5M.
Risks Regulatory delay, lengthy utility technology adoption cycles, competition

Headwaters

HW

NYSE : US$13.32
BUY  Target: US$15.00 

COMPANY DESCRIPTION:

Headwaters Incorporated is a provider of innovative construction materials for use in the light building products and heavy construction industries

Sustainability — Energy & Power Technologies PUSHING FOR OUTPERFORMANCE; MAINTAIN BUY, $15 TARGET
Investment recommendation We expect improving construction market trends to help support P&L momentum. With a host of new products entering the builders channel in 2014, we look for improved operating leverage and cash generation.   Investment highlights  Progress on profitability and outperformance vs. the peer group is impressive, as light and heavy construction markets continue to improve off the sharp multi-year bottom. Management’s “midcycle” earnings power model ($195M EBITDA) appears doable to us.
 Management stays picky, as $80M of accretive M+A is likely FTM, while underlying organic benefits (distribution penetration, ash pricing) continue to build. That said, Q2/14 weather was tough, driving us to tweak our model slightly, even with a couple important weeks of selling left. Full analyst day details below.
 Given the weather, we adjust our Q2 rev/EPS estimates while keeping the full year intact at $791M/$0.60.  Valuation We apply a multiple of 10.0x EV/FY2015 EBITDA (F2015E EBITDA $153M) to reach our $15.00 target.
Risks Volatility in residential construction markets, uncertain flyash regulations/demand and a highly leveraged balance sheet

Nova Measuring Instruments Ltd

NVMI : NASDAQ : US$11.60
BUY  Target: US$15.00

COMPANY DESCRIPTION:

Nova Measuring Instruments is an Israel-based manufacturer of optical metrology equipment for the semiconductor industry. The company manufacturers both integrated and stand-alone tools and has achieved process tool of record in numerous applications for both types of systems.

Sustainability — Energy & Power Technologies STRONG OUTLOOK ON CONTINUED GROWTH IN FOUNDRY 

Investment recommendation We reiterate our BUY on NVMI as the leader in integrated optical metrology with share gains in its stand-alone systems. Investment highlights  Nova printed a strong quarter. Guidance was also very strong and above consensus. For Q1 the company is expecting revenues in the range of $33M to $35M compared to our estimate of $31M and consensus of $30.6M. Non-GAAP EPS is expected to be in the range of $0.19 to $0.23 compared to our estimate and consensus of $0.18.  The company is currently benefitting from the strength in foundry spending, particularly from top customer TSMC, and the ramp of its 20nm process. Nova is dominant in integrated CMP and gaining share in back-end etch at TSMC. Order trends suggest growing share with other foundries as well.  Nova remains well positioned in memory although this segment is generally less capital intensive for OCD metrology. Positively, the company noted that it is in evaluation with all of the leading VNAND companies. We believe that additional memory wins could certainly provide incremental growth, but most of this year’s strength should still come from foundry spending.  There is the potential for an air pocket in foundry in the middle to back half of the year as TSMC appears to be the only foundry investing heavily for 20nm. However, we expect a quick rebound in foundry CAPEX driven by the even more intensive 14/16nm investment later this year. We expect Nova to maintain its momentum in this node as well, backed by significant bookings – we highlight that 20% of Q4 orders were already for 1X nm nodes.

Cree Update

CREE

NASDAQ : US$62.83
BUY 
Target: US$74.00

COMPANY DESCRIPTION:
Cree is the leading manufacturer and supplier of silicon
carbide-based devices for a variety of applications,
including the rapidly growing green, blue, and ultraviolet
LED markets.
All amounts in US$ unless otherwise noted.

Sustainability — Energy & Power Technologies
IN-LINE Q, BETTER GUIDE.
REITERATE BUY AHEAD OF SECULAR
TREND, PT TO $74
Investment recommendation
We reiterate our BUY rating on CREE after an in-line quarter and better
guide, but more importantly we continue to believe that there will be
significant growth in LED component and fixtures this year. With
continued execution, we see Cree as well positioned to capture strong
share of this growing market.
Investment highlights
 While there are always moving parts to Cree’s multi-faceted
business, overall we continue to believe that they are doing all of the
right things to generate a sustainable business model and generate
earnings growth.
 The company is expanding its channel, expanding its product
portfolio, expanding capacity – albeit somewhat calculated to
maintain a healthy balance – and bringing down costs both
upstream and downstream.
 We are encouraged by further growth in lighting products and some
margin appreciation there plus cost downs, price downs and
aggressive pushes for market share in bulbs, which we view as a
solid investment.
 Despite some potential political minutiae, we believe that the macro
will continue to work this year as both the subsidized and
unsubsidized cost of LED lighting is far too compelling to ignore in
many applications.