• We recently met with the management team of Reservoir Link Energy Berhad (RL). Following the meeting, we remain optimistic that the company will return to profitability in 2H22 to be driven by further recovery in both Oil and Gas and RE solar segments.

• The PPA contract extension granted by EC will revive the execution of LSS4 projects. We believe this will benefit RL’s Founder Energy as the largest local subcontractor company to solar developer companies.

• Maintain RL as a BUY with unchanged TP of RM0.52 which implies 13x FY23F P/E. Its RE solar venture will provide both greater visibility to earnings and re-rating catalyst to the stock price.

The key takeaways from management meeting are:

• Despite a weak 1H22 performance, management of Reservoir Link (RL) is optimistic of a better 2H22 to be driven by recovery in both oil and gas and RE solar segments.

• Recovery in RE solar project is expected to gain momentum moving forward following the extension of power purchase agreement (PPA) contract duration by another 4 years to 25 years. The extension was granted by Energy Commission (EC) to all successful bidders of Malaysia’s fourth round of large-scale solar awards (LSS4) in order to maintain project viability following an increase in solar panel price as compared to respective submitted bids.

• Management is also actively pursuing ownership in RE assets. It plans to grow its RE portfolio (which include both solar and hydropower assets) to 100MW by 2025. Currently, its JV company (i.e., RL Sunseap Energy SB) is finalising the 10MW solar PPA agreement with Osram Opto Semiconductors and PE Land (Penang). Following the finalisation of the PPA agreement, RL will recognise construction revenue from the project as the EPCC scope is likely to be awarded to it. This will also be applicable to the JV’s future PPA projects.

• The management is also eager to further grow its energy business beyond the RE solar. It does not rule out further merger and acquisition (M&A) in near future which will be funded through both equity and debt issuance.

• In order to further future-proof its business, it recently signed an MoU with a US partner to provide energy storage solution in Malaysia, Singapore and Indonesia. However, management cautioned that this may not contribute to earnings immediately as the commercial model of the solution is not readily available yet.

• As at end 2Q22, RL’s remaining orderbook stands at RM175mn comprising a call-out O&G contracts and RE solar amounting to RM140mn and RM35mn respectively.

Source: BIMB Securities Research - 7 Sept 2022