KUALA LUMPUR (Dec 3): The earnings of companies involved in the solar photovoltaic (PV) sector may have yet to fully reflect the high valuations investors assigned to them, but analysts remain confident that the long-term prospects of the sector remain bright.

The latest quarterly results of several solar energy producers indicate a steady performance. Solarvest Holdings Bhd (KL:SLVEST), for example, posted a 28% rise in net profit to RM9.2 million for its second financial quarter ended Sept 30, 2024 (2QFY2025) from RM7.2 million a year earlier.

Meanwhile, Samaiden Group Bhd (KL:SAMAIDEN), posted a 12.7% increase in net profit to RM3.34 million in its first quarter ended Sept 30, 2024 (1QFY2025) from RM2.96 million a year ago. While its performance was relatively subdued, core net profit came in at 16% of full-year consensus estimates.

Samaiden’s weaker 1QFY2025 performance (compared with 4QFY2024) was expected, following the completion of the Large Scale Solar 4 (LSS4) programme, said Kenanga Research when commenting on Samaiden’s latest results. However, it expects the company’s earnings to improve in the second half of 2025 in line with expectations of a pick-up in activity for solar engineering, procurement, construction and commissioning (EPCC) players in 2HFY2025, driven by the corporate green power programmes' (CGPP) tight completion deadline by end-2025.

Both Solarvest and Samaiden are trading at forward price-to-earnings ratios (PER) of 24.24 and 22.31 respectively.

Edwin Woo, an analyst at Hong Leong Investment Bank Research, explained that the real potential for Solarvest and Samaiden lies in their future. “If you look at Solarvest’s first-half earnings, they came in at about RM17 million. The consensus, including myself, was looking at around RM41 million [full-year],” he told The Edge.

“So it’s pretty much in line, because the expectation is that when they finish replenishing their CGPP EPCC contracts, the second half of the year will be much stronger."

Solarvest’s growth story is underscored by its rapidly expanding order book, which has nearly doubled from RM469 million to RM961 million in recent months. This uptick in projects suggests a stronger second half, aligning with Woo’s prediction that earnings will pick up in the latter part of the fiscal year. “They will start to deliver their revenue and earnings in the second half,” Woo added.

Samaiden has seen a similarly positive trend. The company’s order book grew from RM315 million to RM521 million, positioning it well for continued growth.

However, not all PV players are doing equally well, and the industry is not without its own challenges. Some, such as Sunview Group Bhd (KL:SUNVIEW), have struggled to convert their contracts into revenue, leading to weaker performance.

Similarly, Reservoir Link Energy Bhd (KL:RL) recorded a decline in revenue from its renewable energy EPCC segment by RM29.8 million in its latest quarter.

Premium on green stocks driving valuations

The current valuation of solar-related companies may be partly driven by the growing demand for renewable energy and the premium investors place on “green stocks”.

Case in point: companies like Uzma Bhd (KL:UZMA) and Reservoir Link, despite having exposure in the solar industry, do not have that high of a PER. This may be due to their main businesses being in the oil and gas sector, which is currently facing low valuations.

Rakuten Trade Sdn Bhd head of equity sales Vincent Lau pointed out that continued interest in renewable energy stocks, particularly those involved in solar power, is driven by the government’s push for the sector.

Lau highlighted the broader trend toward solar energy adoption, particularly in residential and corporate settings. “A lot of residential [homes] are installing solar panels for their houses. There’s still a fair bit of growth,” he said.

Despite earnings not yet catching up with their high valuations, programmes like the LSS and Net Energy Metering (NEM) are expected to fuel growth in the sector, with new quotas for both programmes set to drive future demand.

Woo explained that the quicker turnaround of major quota programmes is a key factor in sustaining industry growth. “The good thing about the solar industry now versus the past is that you don’t have to wait too long for another quota programme,” he noted, pointing to the upcoming LSS5 quota award, expected in December.

Woo also pointed to the mismatch between solar panel manufacturing capacity and installation demand. According to him, while there is an annual forecasted installation of 500 to 600 gigawatts of solar panels, manufacturers have the capacity to produce up to 1,100 gigawatts, leading to an oversupply in the market.

This oversupply means that, despite the challenges faced by panel producers — many of whom are currently operating at a loss — prices are unlikely to rise significantly in the near future.

"Even though installation demand could increase, the market for panels is still not tight," Woo noted, emphasising that this imbalance will likely persist for another year or two, preventing significant price hikes, offering cost benefits to solar energy companies and consumers alike.

Woo suggested that it is ideal for companies to be both an EPCC contractor and asset owner. "It really depends on the bid price," he explained, as the profitability of each role hinges on the tariff won during bidding, which affects the internal rate of return (IRR).

As an EPCC contractor, companies earn revenue through the construction and implementation of projects, while asset owners generate recurring income from owning and operating solar assets.

However, companies generally do not have segmental breakdowns when reporting their earnings, making it difficult to gauge the profitability of each.