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.

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

Capital Power Corporation

CPX : TSX : C$22.92 
BUY  Target: C$26.00

 COMPANY DESCRIPTION: Capital Power has interests in 16 facilities across North America, with about 3,600 MW of net owned or operated power generation capacity as well as 371 MW of capacity owned through power purchase agreements (PPAs). The company has an additional 595 MW of capacity under construction or in advanced development.
All amounts in C$ unless otherwise noted.  Refer to page 2 for target price valuation methodology.
Infrastructure — Power CLEAN Q4/13; MORE CONTRACTS, GROWTH PROJECTS ON SCHEDULE AND TALK OF DIVIDEND INCREASE 
Investment recommendation

Capital Power reported fourth quarter recurring earnings of $0.35 per share, in line with our estimate and the $0.34 consensus estimate. The earnings benefitted from strong plant availability, but were offset by a lower average Alberta power price on merchant production. The fourth quarter results were clean, with solid numbers, and had little in the way of additional news. However, Capital Power continues to march along with the development and construction of new assets which are on time and below original budget: the Port Dover & Nanticoke Wind Farm is now expected to have a capital cost of $300 million, down from an original estimate of $340 million and a revised estimate of $315 million. We view 2014 as a transition year where increased contracting at a modestly lower average price may provide greater certainty over earnings and cash flow yet at a lower level than seen in 2013. However, as new, highly contracted projects are completed in 2015 and 2016, earnings should steadily improve. Also, as greater clarity is known on the targeted early 2015 startup of the Shepard facility, the potential for a dividend increase also climbs. Given the statements from management about a possible dividend increase, we have speculated that an announcement could occur later this year. The company has quality assets, a robust growth portfolio, is becoming more contracted and should generate strong and improving cash flow and earnings per share growth over the next three years, which should garner an expansion in the stock’s valuation multiples as well as provide flexibility for future dividend growth. We believe the stock is set for gradual turnaround as growth initiatives are executed on and as the EPCOR block of shares declines. We are maintaining our BUY rating.

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.