Shoals’ 2022 Not as Bad as Feared, but Medium Term Faces Questions

Business Strategy and Outlook

Shoals has crafted a market-leading position within the solar electrical balance-of-system, or EBOS, market. EBOS is a lesser-known segment of solar and comprises components transferring electrical current from solar modules to an inverter. The main customers of EBOS are engineering, procurement, and construction firms building solar projects. While EBOS is relatively cheap (5% of project’s cost), it is expensive to install. Installation costs can be greater than the cost of the components. Shoals’ strategy against this backdrop is to provide solutions that reduce complexity and installation time, saving customers money.

Shoals has long been a provider of EBOS components to the utility-scale solar industry, but the introduction of its big lead assembly, or BLA, in 2017 marked an inflection point. The product introduced a new architecture for projects, which reduced the amount of wiring and eliminated the need for licensed electricians, helping lower installation costs. Shoals achieved rapid success by targeting the largest EPCs. Three customers supported approximately 40% of revenue in 2021. The company is looking to expand its market share by continuing to target EPCs but also building inroads with developers, which is expected to increase customer stickiness. Additionally, Shoals should benefit from more projects with solar and storage, which have 55% higher EBOS costs, and new products addressing a broader range of EBOS needs. Longer-term growth ambitions include expanding its international presence and entering the electric vehicle charging market. The company’s international ambitions with a wait-and-see approach. The company has been operating internationally for a few years, but non-U.S. customers accounted for negligible sales in 2021 and the international market is generally more fragmented than the U.S. The EV charging market opportunity that the company entered in 2022 is viewed constructively. The EV market is plagued by similarly high installation costs (50% of total cost is installation versus 30% for solar).

Financial Strength

Shoals’ leverage and liquidity are weaker than preferred, but operating cash flow growth is projected to improve metrics in the coming 12-24 months. The company’s leverage stands at approximately 3 times debt/EBITDA, which is the result of borrowings to pay a special dividend to equity holders prior to its IPO. Shoals’ debt profile consists primarily of a term loan due 2026 and borrowings under its revolving credit facility. Shoals is expected to prioritize paying off the amount drawn on its credit facility over the next couple of years. This debt reduction coupled with operating cash flow growth should improve its credit metrics.

Bulls Say’s

Shoals offers peer-leading margins and returns on invested capital in the solar industry.
The solar market is growing and the addition of storage further increases the addressable market.
International and EV charging markets have a chance to be sizable contributors to Shoals’ growth.

Company Profile

Shoals Technologies Group Inc is a provider of electrical balance of system or EBOS solutions for solar energy projects, primarily in the United States. EBOS encompasses components that are necessary to carry electric current produced by solar panels to an inverter. The products are sold principally to engineering, procurement and construction firms that build solar energy projects. In 2022 the company entered the electric vehicle charing market.

(Source: MorningStar)

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