Photowatt IPO delayed again – Versant drops ATS Automation to sell

You can’t say the market hasn’t been patient, waiting months for the Photowatt initial public offering to begin to trade on the NYSE (co-led by BMO Capital Markets and UBS Securities). Photowatt bills itself as “an integrated designer, manufacturer, marketer and seller of solar modules and installation kits and provides solar power system design and other value-added services to its customers.” Photowatt operates an integrated manufacturing facility in Lyon, France, a module assembly operation in Albuquerque, New Mexico, and has a Spheral Solar(TM) development facility in Cambridge, Ontario.

But, after announcing that it was again delaying the offering (they’ve already filed seven prior registration statements, I believe, according to Gary Will), Versant Partners Equity Research Department has finally had enough, and dropped ATS Automation (ATA:TSX) to a sell this morning:

“We are lowering our target on ATA shares to $6.80 from $10.90.

Automation Tooling Systems announced on Friday that the marketing period of the Photowatt Technologies IPO has been extended following consultation with the joint book-runners on the deal. We can only suspect that this delay is due to less than expected demand for the shares. Although we have been waiting for the IPO process to conclude before updating our model and valuation of each aspect of the business, we are revising our target on this apparently negative development and have reexamined the environment vis-à-vis the trading of comparables to the solar business.

VALUATION
We obtain our target price by separating out the valuation of the Photowatt solar business from the core business, which includes ASG and PCG. Our combined target valuation of $385M, or approximately $6.50 per ATA share, is comprised of $290M for Photowatt and $95M for the core business. Adding in $0.30 for their investment in Canadian Solar, we achieve our target price of $6.80.

Core business target maintained at $95M
Despite the modestly improving core business, the stagnant backlog, low margins and volatile client segments justify us maintaining our valuation multiple at a 15× P/E multiple on F2008 earnings. Considering that we expect
ASG and PCG to represent 53% of earnings in F2008, using a 15× P/E multiple provides a target of $95M or $1.60 per ATA share.

Photowatt target lowered to $290M
Using the remaining 47% of earnings forecasted in F2008, or $5.6M, we can use a 45× P/E multiple (at the high end of the comparable range) to achieve a target valuation of $250M. Using a 1.5× P/S multiple (at the low end of the comparable range) on our F2008 estimate of $220M in revenues, we would obtain a target of $330M. Taking the mid-point, we obtain $290M or approximately $4.90 per ATA share. This is below the $550M target we
obtained previously when using a P/S multiple of 2.5×.

Investment in Canadian Solar worth $0.30 per ATA share
ATS owns 1,864,398 shares of Canadian Solar Inc, which recently went public on the NASDAQ exchange under the symbol CSIQ. This investment is currently valued at approximately US$17M, or about $0.30 per ATA share.

Recommendation reduced to Sell
With our potential return at -23%, we are reducing our recommendation from Hold to Sell.”

Is this a valuation issue, a bad sign about the buyside’s view of solar, or just an extended lull in the macro market for growth stories? Does anyone know?

MRM