• Incorporated in 2008, Solar District Cooling Group Berhad (SDCG), is primarilyinvolved in the provision and maintenance of building management systems (BMS),solar thermal systems, and energy-saving services, as well as the maintenance ofother systems and equipment.

• Moving forward, we project SDCG’s revenue to grow at 5.3-16.9%, reachingRM28.0m-RM35.5m for FY24-26f, while its core net profit is expected to increaseby 8.4-19.2% to RM6.9m-RM8.9m, supported by the overall growth in capitalexpenditure in pursuant of proceeds.

• We ascribe a fair value of RM0.53 (upside of 39.5% against IPO price of RM0.38) for SDCG. Our valuation is derived by pegging a forward P/E of 27x to the FY25f EPS of 1.95 sen. We believe the forward P/E of 27x is fair, given the average P/E of the closest peers stood at 27.2x.

Investment Highlights

Building Manufacturing Systems (BMS). The growth of BMS products is closely tied to the expansion of Malaysia's construction sector, which represents over 3% of the country’s GDP. In 2023, the construction industry’s real GDP grew by 6.1% YoY. Looking ahead, the Ministry of Finance (MoF) forecasts a 6.8% growth in the sector for 2024, creating more opportunities for BMS players as demand for related services increases.

Malaysia’s Net Zero 2050 Initiatives. The Malaysian government has introduced the National Energy Transition Roadmap (NETR) as a key component of its MADANI economic reforms. The NETR plans to leverage RM6 billion in investments to connect small and medium enterprise Energy Service Companies (ESCOs) with government projects, supporting the goal of Net Zero by 2050.

Opportunities for SDCG. As a certified ESCO, Solar District Cooling Group Berhad (SDCG) is well-positioned to benefit from this growth. The company offers financing facilities or capital expenditure (CapEx) for solar thermal and energy services systems, with CapEx repaid by clients through fixed cost charges.

Strong momentum ahead. As SDC has sourced its thermal solar and energy-saving services primarily to hospitals, we anticipate that future growth will be concentrated in this sector, given that the group has served only 7 out of 160 public hospitals. Also, the group has recently tapped into maintenance for chiller segment, which we believe could potentially boost revenue in tandem with the growth in data centres.

Resilient contracts and orderbook. As of the latest practicable date (LPD), SDCG has more than 10 ongoing projects in BMS and solar thermal systems, with contract values totalling RM47.1m. The unbilled order book stands at RM16.5m for FY24 and RM6.1m for FY25, providing earnings visibility in the near term.

Stable and strong margins. The group has consistently improved its profit margins, with PAT margins increasing from 13.49% in FY20 to 23.83% in FY23, and currently standing at 20.24% as of FPE24. This reflects SDCG's strong pricing power and effective cost management. Looking ahead, we expect margins to remain stable in line with the group’s positive outlook.

Company Background

Solar District Cooling Group Berhad specializes in the provision and maintenance of building management systems (BMS), solar thermal systems, and energy-saving services. The company primarily operates in Malaysia.

Business Overview

Building manufacturing systems (63.8% of FY23 revenue). This segment integrates various building facilities, providing automation and energy-saving services. It includes centralized management of air conditioning, lighting, elevators, electrical systems, and more.

Solar thermal systems and energy saving services. (23.8% of FY23 revenue). This segment focuses on solar thermal hot water systems, especially for heavy users like hospitals. It also involves retrofitting fluorescent lighting with LED lights to reduce fossil fuel use and electricity consumption.

Maintenance of other systems and equipment (12.3% of FY23 revenue). The group provides maintenance for systems like gas-fired chillers.

Partially driven by recurrent revenue. The group generates revenue through two primary streams, which are:

• Recurrent revenue – These contracts, ranging from 1 to 6 years, provide consistent income from maintaining BMS, solar thermal, and energy-saving systems.

• One-off (project based) revenue – This revenue stream comes from projectbased work, where revenue is recognized based on project completion.

Financials

In FY23, SDCG’s revenue surged to RM26.6m, up from RM14.7m in FY20, achieving a CAGR of 21.9%. This growth was driven by increased revenue from BMS and solar thermal systems.

Moving forward, we project SDCG’s revenue to grow at 5.3-16.9%, reaching RM28.0- 35.5m for FY24-26f. Core net profit is expected to rise by 8.4-19.2%, reaching RM6.9- 8.9m, supported by the ongoing orderbook, coupled with the expansion plans within the BMS and solar thermal segments.

Valuations

We ascribe a fair value of RM0.53 (upside of 39.5% against IPO price of RM0.38) for SDCG. Our valuation is derived by pegging a forward P/E of 27x to the FY25f EPS of 1.95 sen. We believe the forward P/E of 27x is fair, given the average P/E of the closest peers (Fig #7) stood at 27.2x.

Investment Risks

Reliance on key senior management. Discontinuation of service of the key senior management may disrupt key decision making within SDCG’s business operations.

Termination or failure to secure new contracts. Any termination of contracts or failure to secure new ones could lead to revenue loss and negatively impact financial performance.

Subject to regulatory requirements. Any unfavourable regulatory policies from the authorities, such as discontinuing or reducing energy performance services in public hospitals, may affect profit margins.

Dependent on skilled subcontractors. Any shortages in the supply of skilled subcontractors could adversely affect the quality standards and timely delivery of production projects, which, in turn, may negatively impact SDCG’s reputation, business operations, and financial performance.

Source: Mplus Research - 2 Sept 2024