Cypark is a key beneficiary to the new government’s promise to increase renewable energy generation from 2% to 20% by 2025. This positive regulatory framework and Cypark’s good track record in solar PV plant ups will drive a three-year earnings CAGR of 15%. Highlights from a recent meeting and site visit: a) Cypark is on track to complete a 25MW waste-to-energy plant by 2Q19, and b) it is on track to deliver a 30MW solar PV project by end-20. Maintain BUY with a RM2.70 SOTP-based target price, post placement exercise.

WHAT’S NEW

• Three-year earnings CAGR of 15%. We met with management recently and gathered that overall business is chugging along well. The company is poised to deliver a 3-year earnings CAGR of 15%, underpinned by the commercial operation of a 25MW biogas and biomass waste-to-energy (WTE) plant in Ladang Tanah Merah, Negeri Sembilan by 2H18. Additionally, the company has a RM600m orderbook with contracts to build three large-scale solar PV (LSS) power plants. These three LSS projects were awarded under the 2nd LSS tender opened by the regulator, Energy Commission, in Jul/ Aug 17.

STOCK IMPACT

• Pioneer in floating solar PV projects in Malaysia. Out of the three LSS projects, Cypark will own a 40% equity in a 30MW floating project in Empangan Terip, Negeri Sembilan. Following our recent site visit to Cypark’s maiden 270 KW floating solar PV project in Ulu Sepri Dam, Negeri Sembilan, we believe execution risk is minimised through: a) its experience, b) its working relationship with the world’s largest developer and innovator of floating solar systems, CEIL el TERE, France.
• Strong recurring income in the next five years. The above renewable energy (RE) projects have paved the way for the company to secure long-term (21-25 years) concessions with TNB. Importantly, the RE projects will provide an EBITDA margin uplift for the group (RE projects command gross margins of 48% vs blended gross margin of 29%) and boost recurring income. We expect RE revenue to account for 34% of FY20 revenue and help drive a 3-year earnings CAGR of 15%.
• The two key RE projects are estimated to yield project IRRs of 10%. Based on a project IRR of 10%, the equity enhancement from both RE projects is approximately RM83m, or 10% of current market capitalisation.
• Blue-sky scenario: More LSS tenders to be offered in the near future. This initiative to harvest energy from the sun under the LSS programme will see solar generation mix rising from 0.14% (1Q17) to 0.4% (end-20) of a total of 23,000MW of installed generation capacity in Peninsular Malaysia. We note that this is likely lower than the PH’s manifesto target and as such, we expect more LSS exercise tenders in the immediate future.

ESSENTIALS

• The Ladang Tanah Merah WTE project recognises income from four major components: a) landfill closure income, b) construction of WTE plant, c) waste segregation – earning a tipping fee from the local council of about RM12m annually, and d) REPPA income from the WTE plant. The Ladang Tanah Merah WTE project is expected to generate annual revenue of RM80m (tipping fee: RM12m, REPPA income: RM68m).
• WTE REPPA signed with TNB is for a period of 25 years, commencing from Jul 19. Based on our recent meeting, we understand that the WTE plant is expected to complete construction by end-18 and thereafter, another 2-3 months of testing and commissioning works will be undertaken. As such, we expect the WTE REPPA to kick in as early as 2Q19 (latest commercial operational date is Jul 19).

EARNINGS REVISION/RISK

• Maintain three-year earnings CAGR of 15%. We project core net profit of RM71m for FY18 and RM81m for FY19 on the back of: a) RM600m engineering, procurement and construction (EPC) orderbook to build LSS projects over FY18-20, and b) maiden contribution from the 25MW Ladang Tanah Merah WTE project from 2H19 onwards. For FY20, we have conservatively assumed no additional contact wins for new solar power plants. That said, we note that the company aims to bid for more LSS projects in the near term.
• Key risks include: a) sharp depreciation of the Ringgit – dampening project IRRs for the 30MW LSS project in Negeri Sembilan, b) teething issues with the 25MW Ladang Tanah Merah WTE plant – which may lead to lower or absence of capacity payment, and c) failure to win more landfill contracts in the near future.
• Improving balance sheet strength, thanks to cash flow uplift in FY20. Gearing level will likely ease to 60% by FY20 (from 91% in FY17) as we expect strong cash flow from maiden Ladang Tanah Merah WTE project to kick in by mid-19. This paves the way for higher dividend payout in the longer run. The group has a mandate to pay out at least 25% of net profit as dividends. At this juncture, the company generates attractive ROEs of 11-13%. As such, we believe retained earnings should be ploughed back into securing more RE projects.

VALUATION/RECOMMENDATION

• Maintain BUY with a SOTP-based target price of RM2.70, after factoring in a 10% private placement at RM2.18-2.28/share. At our target price, the stock will trade at an undemanding 10x FY19F PE against sector PE of 13x. It is also broadly in line with the stock’s 5-year mean PE of 10.5x.
• The 10% private placement is ongoing and will be done in a couple of tranches priced between RM2.18 and RM2.28. The proceeds of the cash (estimated at RM65m) have been earmarked for working capital for its RM600m orderbook that consists the building of three large-scale solar PV (LSS) power plants.

SHARE PRICE CATALYST

• Key re-rating catalysts include securing new solar PV projects. With a positive regulatory framework (new government in favour of the RE theme), the group’s strong technical capabilities will ensure sustainability of future contract wins.

Source: UOB Kay Hian Research - 27 Jul 2018