Investment Highlights

• Record renewables installations despite Covid-19 impact. We attended Rystad Energy’s Deep Dive Renewables webinar yesterday which was presented by its head of global renewables Gero Farruggio. He highlighted that renewables installations in solar, wind and storage facilities are set to rise by 40% YoY to a record 140GW globally after experiencing a dip in 2QFY20 due to Covid-19 project delays. This is predominantly driven by solar photovoltaic (PV) solutions, followed by onshore wind installations.
   
• Growth driven by China and US. With Europe relatively flattish in new capacity additions, China is expected to be the main driver for renewable capacity increase with an addition of 50GW this year, followed by the US at 30GW. However, 55% of 2020 global capacity additions are still under construction with completion expected by 4Q2020.

• Surge in projects above 500MW. The increasing interest in renewable energy projects has driven up the scale and capacity of the facilities. In 2020, only 16% of the 140GW global additions comprise projects below 50MW, vs. 59% in 2017. Projects above 500MW account for 7% of 2020 additions compared to almost nil in 2017.

• Rising green hydrogen projects. While green hydrogen projects account for only 30GW (14% of total renewable capacity) of announced 2020 projects, the prospective pipeline could easily double to 63GW. The leading electrolyser contractors are Hydrogenics, Siemens and ThyssenKrup.
  
  The vast majority of industrial hydrogen, currently produced from natural gas through steam methane reforming processes, is referred to as brown, grey or blue hydrogen. However, hydrogen can also be produced by the electrolysis of water by using an electric current to decompose water (H2O) into its component elements of hydrogen and oxygen. If this electric current is produced by a renewable source such as solar PV or wind turbine, the clean hydrogen produced without CO2 emissions is called green hydrogen.
  
  However, electrolysers are currently expensive due to lack of scale as well as the high containment cost of hydrogen gas, which is highly flammable and erodes metal pipes. Hence, these costly hydrogen solutions currently require government support and incentives.

• Rising renewable M&A activities. The transition of oil & gas companies from fossil fuels have spurred joint venture partnerships as well as merger and acquisition activities in the renewable sector, with Total tripling its capacity this year (see Exhibit 9). As mentioned in our update on 18 September 2020, shareholder and green agenda activism has accelerated plans to spend a capex of US$200bil by 2030 with almost all majors committing to achieve net zero emissions by 2050 with plans to divest their overseas oil & gas investments. Europe and Japan have committed to this target by 2050 and China by 2060.

• So far Petronas and Yinson have invested in solar. The shift towards renewable energy in Malaysia has already been underway over the past 3 years with Petronas operating 448MW of solar capacity in India and Southeast Asia, and presently developing another 212MW. In Malaysia, Petronas is operating and developing 50MW of solar capacity, part of that to supply to 15 Tesco stores. Amongst local service providers, only Yinson has taken the plunge by investing US$30mil for a 95% equity stake in a Rising Son Energy, which has a 160MW solar farm in Bhadla Solar Park Phase II, Rajasthan, India. Nevertheless, we envisage a slow adoption of renewable projects by local O&G providers given that a large segment is currently burdened by high gearing amid a low oil price environment.

• Maintain OVERWEIGHT call with 6 BUY calls vs. only 2 SELLs and 1 HOLD. With Brent crude spot prices stabilizing above US$40/barrel, we believe that the down cycle has reached a bottom with the worst experienced in April this year when Brent spot prices fell to a low of US$14/barrel while futures inverted to an abnormal negative price due to lack of storage capacity. We like Yinson as its earnings growth momentum from the maiden contributions of floating, production, storage and offloading vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa.
  
  We also continue to have BUY calls for Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. We recommend Petronas Gas, as the group's optimal capital structure strategy and resilient earnings base translates to highly compelling dividend yields.

Source: AmInvest Research - 28 Oct 2020