Cypark Resources (Cypark) reported a slight core net loss after minority interest and sukuk (LATAMIS) of RM2.3m in 1QFY24 from core profit after minority interest and sukuk (PATAMIS) of RM74.2m in 6QFY23, due to the absence one-off deferred tax asset reversal from the impairment of RM376.5m undertaken in the preceding quarter. The result is below ours and consensus full-year PATAMIS expectation of RM18.7m and RM23.8m. The variance is mainly caused by sub-optimal operations of the waste-to-energy (WTE) plant, though mitigated by various newly-secured projects that contributed higher margins for the quarter. In September 2023, Jakel Capital (Jakel) injected RM265m into the Group via a perpetual sukuk, which brings a total of RM332m capital injected since its onboarding as major shareholder. We believe this will provide ample reserves to complete the Large Solar Scale 3 (LSS3) Merchang facility, satisfy its debt obligations and finance potential new orderbook. Both LSS2 Danau Tok Uban (DTU) and LSS3 Merchang are targeted to complete by end 2023. Meanwhile, its WTE plant is expected to achieve optimal operation in November 2023. On this note, we revise our estimates for FY24F/25F higher by 8%/12% respectively. We maintain our Neutral recommendation though with higher sum-of-parts (SOP) based TP to RM0.90 (from RM0.63), which implies a 20x multiple to FY25F EPS.

• Sub-optimal WTE plant remains the drag with the segment recording a net pretax loss of RM6.2m in 1QFY24. Nevertheless, overall pretax loss for the quarter was minimized by the construction and engineering segment with better margin from various newly-secured projects including the construction of Selgate hospital in Rawang worth RM108.8m, secured in April 2023.

• Potential upside from WTE plant. Based on guidance, the WTE plant is expected to achieve optimal operation level in November 2023 after having various system upgrades and technical reviews. There is further upside on the plant as it is in discussion with authorities to revise the existing tipping fee of RM33 per tonne to be comparable to current market rates. This will improve its margin and cashflows significantly upon approval from the authorities.

• LSS2 and LSS3 target completion by December 2023. The long outstanding issue of interconnection facility for LSS2 DTU has finally been resolved and is to be completed by December 2023, as we understand. Upon completion of LSS2, the Group will start to recognise operating and maintenance (O&M) revenue for the period of 21 years. On another note, LSS3 Merchang is on-track to be completed by the same period. It is also noteworthy that LSS3 Merchang requires capital commitment of RM192.7m. The recent injection of RM265m from Jakel via perpetual sukuk subscription is therefore timely to meet its cashflow obligations, with ample buffer.

Source: PublicInvest Research - 2 Oct 2023