REFILE-BUY OR SELL-Does SolarWorld's buyback make it a buy case?

Thu May 20, 2010 6:44am EDT

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(Clarifies in fourth paragraph that 43 percent of analysts, and not a majority, rated SolarWorld a "buy")

(For more BUY OR SELL stories, click [BUYSELL/])

* Bears see buyback adding to balance sheet risks

* Bulls see weak euro, strong demand as share price triggers

By Christoph Steitz

FRANKFURT, May 20 (Reuters) - SolarWorld's SWVG.DE share buy-back has renewed investor interest in the company's stock, which hit a four-year low last week after first-quarter profit missed estimates. [ID:nWEA1455]

Solarworld, Germany's biggest solar company by revenue, said on Thursday that so far it had bought back 1.4 million shares at an average price of 9.46 euros ($11.75). It plans to buy back up to 10 percent of the company's share capital. [ID:nWEA3255] [ID:nWEA200]

Solarworld shares were up 1 percent at 8.77 euros by 1000 GMT on the Frankfurt bourse.

The shares, which have recovered slightly from last week, may look cheap, but 43 percent of analysts, the biggest group, polled by Thomson Reuters StarMine rated the stock a "hold", leaving investors wondering whether now is a good time to buy.

Bears have cautioned that the buy-back could have a negative impact on SolarWorld's balance sheet, while bulls see a weakening euro and strong demand in Germany, the world's largest market, as a reason to own the stock.

BALANCE SHEET RISKS

Bank of America Merrill Lynch analyst Matthew Yates has rated the stock "underperform", writing in a note that while the company had the liquidity to do the share buyback he saw net debt rising to 450 million euros by the end of 2010 and 650 million by the end of 2011, from 296 million at the end of March.

"Leverage was already a concern for us and seeing the company spending a further 100 million euros to buy back stock would only heighten our worries," Yates wrote.

UniCredit analyst Michael Tappeiner, who is keeping a "sell" rating on the stock, also sees net debt increasing and warned that weak fundamentals -- most importantly the cut in solar subsidies in Germany from July -- could become a problem for the company. [ID:nLDE6452I3]

"In addition, German FiT (feed-in tariff) cuts could amount up to 13 percent in Jan 2011, which would reinforce price and margin pressure in 2011," he wrote.

WEAK EURO, STRONG DEMAND

Analysts at Exane BNP Paribas have kept their "outperform" rating on SolarWorld -- one of the few profitable solar players in Germany -- pointing to a weakening euro which could boost the company's business abroad.

"Despite regulatory uncertainty in Europe ... which could affect PV (photovoltaic) demand/pricing as soon as H2 10, the current euro weakness is quite positive for European competitiveness," they wrote.

Bryan, Garnier & Co analyst Ben Lynch also sees upside for the company, noting that customers are bringing forward their orders ahead of subsidy cuts that come into effect in the middle of the year and saying it had an "unchallenging valuation".

"While SolarWorld's (first-quarter results) were disappointing, we expect that positive (first-half) fundamentals ... will prove more sustainable than bearish market expectations," he wrote, reiterating his "buy" rating. ($1=.8054 Euro) (Editing by Karen Foster)

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