Excluding exceptional items amounting to RM2.5m, the Group saw an inching up in its core net profit to RM0.8m in 4QFY22 from RM0.7m in 3QFY22. This is underpinned by more oil and gas (O&G) activities completed during the period as compared to the previous quarter. However, on YoY basis, the Group reported a weaker core net profit as compared to the RM2.7m in 4QFY21 due to completion of the Mauritania project in Oct 2021. Overall, 12MFY22 saw a core net loss of RM2.6m, lower than our RM0.1m net loss estimate and consensus net profit of RM3.0m. In its result briefing yesterday, the Group voiced optimism on the renewable energy (RE) segment on the back of local demand from Large Scale Solar 4 (LSS4) players and lower cost of material for solar panels. It also intends to scale-up the RE segment, as a concession owner and also expand its regional footprint via acquisitions, although we believe this may present some challenges such as execution and country political risks. Having said that, we adjust our forecasts to reflect more contributions from the RE segment, and the changes of financial year end from Dec to Jun year end. We raise our call to Neutral (from Underperform) and lift our TP to RM0.39 (from RM0.31) based on a sum-of-the parts valuation to reflect more contribution from the RE segment from FY24 onwards.

• Results highlight. RL’s 4QFY22 core earnings is slightly higher by RM0.1m from 3QFY22 due to more O&G-based works completed following delays seen in Sep 2022, ones which typically carry higher margins as compared to the RE segment. This offset a significant decline in RE-related revenue. However, on YoY basis, weaker core net profit was reported due to completion of the Mauritania project in Oct 2021. 12MFY22 saw a core net loss of RM2.6m, from core net profit of RM12.2m in the previous period.

• Optimistic over domestic RE segment. The Group expects more contributions from the RE segment from FY23 onwards on the back of demand from LSS4 players to achieve targeted commercial operation date by Dec 2023 and 600MW quota of virtual power purchase agreement (VPPA). It also expects to see margin expansions in the segment, riding on lower material cost of solar panels amid overcapacity in China.

• Scaling-up the RE segment. The Group unveiled its aspirations to scale-up its RE segment as a concession owner with a regional footprint via acquisitions, particularly in Indonesia for now. Recently, the Group announced entering into Term Sheet to acquire 90% of PT Eco Power Engineering as the SPV and landowner, to enter into a power purchase agreement (PPA) with Perseroan Listrik Negara for a 9.6MW Hydro Power Plant. Notwithstanding the acquisition may provide value accretion to the Group, we believe it may present execution risk given substantial front-loaded capital expenditure for the project. To some extent, it also has country political risk although it can be minimized by obtaining assurances/guarantees from government agencies.

Source: PublicInvest Research - 21 Feb 2023