Cypark Resources (Cypark) reported a headline net loss of of RM264.8m for 18MFY23 due to a kitchen sinking exercise which saw impairment losses amounting to RM376.5m for the current quarter (6QFY23). The impairment loss is mainly from i) provision of potential liability arising from liquidated ascertain damages (LAD) due to delays in existing projects, ii) impairment of intangible assets, contract assets and receivables, and iii) extended cost pertaining to project completion. Stripping out the impairments, Cypark recorded a net profit of RM74.2m for 6QFY23 versus RM3.0m in 5QFY23, lifted by a one-off deferred tax asset reversal amounting to RM83.5m. The overall 6MFY23 core performance lags our estimates of an RM8.2m net profit however, due to the one-off reversal and impairments. We remain cautious over Cypark’s outlook, given its sub-optimal waste-to-energy (WTE) plant operations, and delays in commissioning various other key projects. We retain our estimates however, having conservatively already accounting for the delays, though we caution for potential downside risk should this be prolonged. Our Neutral rating and RM0.63 TP are retained.

• Minimal contribution from WTE. To recap, Cypark’s WTE plant at Ladang Tanah Marah (LTM) has commenced commercial operations on 14 Dec 2022 and started recognizing revenue since 5QFY23. However, revenue contribution from sale of the plant’s green energy for the full period 6QFY23 came in at only RM9.2m due to sub-optimal operations during the initial stages.

• Kitchen-sinking. Cypark has appointed new auditors for the current financial, who are likely to have recommended the Group RM376m in impairments, for the following: i) RM91m provision arising from LAD, ii) RM180m impairment of intangible assets, contract assets and receivables, and iii) RM105m for extended costs pertaining to project completions.

• Cautious over delays in LSS3 project. Cypark cited it will focus on delivering active projects such as the Selgate hospital construction contract worth RM109m awarded in April 2023, which is scheduled to be completed in January 2024. Cypark’s Large Solar Scale 3 Danau Tok Uban (LSS3 DTU) commercial operation date (COD) is now delayed towards the end of 2023 instead of May 2023 as previously guided. Due to the delay of COD, the Group may have to incur the additional costs while being unable to recognize its operation and maintenance (O&M) revenue from LSS3 DTU, thereby weakening its financial strength and liquidity, potentially also affecting working capital for future projects

Source: PublicInvest Research - 3 Jul 2023