Zacks expands on ForceField's new green energy segments
By Steven Ralston, CFA
ForceField Energy (OTC Markets:(FNRG)), formerly SunSi Energies, is a manufacturer, distributor and licensee of green energy products and systems. Last year, ForceField entered two additional alternative energy industries through the acquisition of a controlling interest of TransPacific Energy and an exclusive distribution agreement with Shanghai Lightsky, creating two new business segments: Organic Rankin Cycle (ORC) systems and LED lighting, respectively. The strategic positioning transformed ForceField into a broader-based company, which should benefit from the secular trend towards more efficient energy generation and consumption. Multiple new relationships and trials have been announced over the last few months. In the legacy trichlorosilane (TCS) market, polysilicon prices have rebounded from the December lows, and a recovery appears to be underway.
In August 2012, ForceField Energy acquired a controlling 51% interest in TransPacific Energy (TPE), a renewable energy company focused on the generation of electricity through the use of Organic Rankine Cycles (ORC). Utilizing blends of proprietary refrigerants, TPE’s ORC units capture heat energy from heat sources (such as industrial flue gas, geothermal sources and biomass processes) and convert the waste heat into electrical energy. TPE's competitive advantage lies in the broad range of temperatures (from 75° F to 1000° F) at which the units can operate and the benign attributes of the refrigerants (non-toxic and non-flammable).
TransPacific is well-positioned to benefit from the deployment of ORC projects based on renewable sources and waste heat worldwide, but especially in the US and China. ForceField has already negotiated the installation of two ORC units at Zibo Qilin Fushan Iron & Steel Company in China. ForceField will own the ORC units and sell the electricity generated to Qilin at a discount to the local utility’s price at an anticipated revenue run rate of $600,000 annually over twenty-year period. In the second phase, ForceField (at its discretion) may install an additional two ORC units. The Qilin project will showcase the economic and environmental advantages of installing ORC systems in order to harvest heat energy from industrial exhaust systems.
In August 2012, ForceField Energy entered into a five-year distribution agreement acquiring the exclusive North American rights to sell and distribute LED lighting products manufactured by Shanghai Lightsky Optoelectronics Technology Co., Ltd. (aka Lightsky). ForceField’s LED strategy is primarily focused on targeting multi-location commercial companies where retro-fitting existing facilities with the installation of LED lighting products is able to reduce the level of electrical energy consumption and future maintenance costs. Prime targets for the rapid adoption of LED lighting are warehouses, casinos, corporate campuses, parking structures, airports and 24/7 lighting applications. In addition, ForceField has expanded its marketing efforts to the outdoor LED display marketplace where Lightsky has a proven record of designing and installing large outdoor LED display screens.
In the United States, the LED lighting market is growing at a 32% compound growth rate due to the lower electrical power consumption and longer lives of LED lamps, along with government regulation designed to phase out inefficient incandescent light bulbs. Management is targeting the commercial lighting market, which also includes the industrial, institutional and governmental segments, where the additional advantages of LED lighting are also important selling points, specifically reduced maintenance costs (lower frequency of bulb replacements) and lower heat generation (reduced air conditioning costs).
ForceField’s strategic LED business plan involves aggressively introducing Lightsky’s LED products in the North American market by rapidly building a network of sub-distributors that can target large-scale customers (commercial, industrial, institutional and governmental) that would benefit from upgrading to LED lighting. An ideal client is a multi-location entity where economic evaluations strongly influence the decision-making process. The rationale to transition to LED lighting products is compelling considering the relatively short payback period (under two years) and long-term cost benefits.
ForceField has announced four sub-distribution deals in the last five months. In early September 2012, ForceField retained the services of Global Resource Group, Inc. to help generate immediate interest in Lightsky’s LED product line. Thus far, Global Resource Group has negotiated LED trials with a private hospital group in the Midwest and the Gold Rush Gaming Room, LLC, in Texas. In October 2012, ForceField entered into a strategic alliance with Commonwealth Energy Group, LLC, an energy consulting firm that can offer to its customers not only the turnkey LED lighting solutions that utilize Lightsky products, but also the energy audits required to secure tax savings, rebates and/or grants. In January 2013, ForceField entered into a distribution agreement with Gonneville, Inc. for both Lightsky’s LED products and TransPacific Energy’s ORC systems. And in February, a 5-year distribution agreement for both LED and ORC technology products was signed with DEK International, a global supplier of to the gaming industry with a core market presence in Latin America.
Also within months of securing the exclusive North American distribution agreement with Lightsky, ForceField announced that four trials in separate industries (hospital, fleet management, gaming and auto tire service) were arranged to evaluate the efficacy of converting to LED lighting for the purpose of evaluating broader deployment of LED lighting products. The interest level and progress achieved by ForceField in a relatively short period of time exceeded management’s expectations.
In addition, ForceField is pursuing specific opportunities for large contracts related to the conversion to LED lighting, specifically a multi-million dollar bid to retrofit streetlights in Costa Rica. ForceField is actively pursuing distributing prospects not only in its exclusive Lightsky territories of the U.S., Canada and Mexico, but also in Latin America, the Caribbean and France where the company has received approval to sell Lightsky LED products.
With majority ownership positions in two Chinese companies (90% the Zibo Baokai trichlorosilane distribution company and 60% of the Wendeng trichlorosilane production facility), ForceField is positioned to benefit from a recovery of the solar-grade polysilicon market. Spot prices for polysilicon have been steadily increasing since December 2012. Baokai and Wendeng are low-cost producers in China and should be able to take advantage of the Chinese government’s $454 billion commitment to renewable energy projects in China’s five-year plan.
Utilizing our benchmark valuation methodology, we expect ForceField’s stock to trade in the middle of the top quartile of our estimated valuation range of 1.1 and 3.2 times normalized sales, which projects at price target of $6.60.
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