Reservoir Link Energy (RL) reported lower core PATAMI at just RM0.5m in  5QFY23 as compared to RM1.1m in 4QFY23. This is despite the Group recording higher QoQ (+38.6%) revenue growth, owing to significant inroads made in the  renewable energy (RE) segment (+58.5%). On a YoY basis, the Group reported notably better results as compared to the net loss of RM1.1m in 1QFY23 underpinned by a 6-fold revenue growth. Overall, the financial result is below our  6MFY23 estimates at only 10.4% of estimates however. The Group recorded a net  loss of RM2.1m for 15MFY23 as compared to consensus net profit estimates of  RM8.9m for FY23F meanwhile. In pursuit of growth in the RE segment, the Group  is transforming from a service provider into concession owner of RE assets. However, the Group’s liquidity constraints could be a setback on the execution of  its new business ventures in the pipeline given substantial front-loaded capital  expenditure requirements. On this note, the Group has plans to undertake a  private placement of shares and to take on more debt to finance the projects. We  maintain our Neutral call and TP of RM0.39, the latter subject to significant  dilution risk in the near term. We are also cautious on the execution of its new  business ventures arising from its tight liquidity situation.

• Growing RE segment, though with lower margin. RL reported significant revenue growth of 58.5% in the RE segment, compared to oil and gas (O&G) which only grew by 8.8% on a QoQ basis. This brings 15MFY23 revenue contribution mix of O&G-to-RE to 33:64 from 78:22 in 12MFY21. The significant change suggests that the Group’s overall business has shifted.  Although this contributes to overall growth in revenue, overall net PATAMI  margin has deteriorated however, (-2.4 ppts QoQ) due to the lower gross  margin and high minority interest (49%) in its RE arm, Founder Energy.

• Transforming from service provider into concession owner. In pursuit of  growth in the RE segment, the Group has secured 4 additional solar contracts and wastewater treatment plant concession from Unilever in April 2023. In  addition, the Group is in the midst of securing 30MW quota under Corporate  Green Power Programme (CGGP) and a 9.6MW mini hydro power purchase  agreement (PPA) with Perseroan Listrik Negara. We believe these concessions could provide stable recurring income and significant growth at  both the revenue and PATAMI levels.

• Liquidity constraints could be a setback. The significant increase in its  receivables and contract assets has caused the Group to further drawdown  borrowings including the use of bank overdrafts to finance its working capital.  This could be a setback in executing its new ventures given substantial front-loaded capital expenditure requirements. While RL has proposed a private  placement up to 30% of the issued shares and debt to finance the projects,  the former is highly dilute in the near term.

Source: PublicInvest Research - 23 May 2023