SLVEST’s 9MFY24 results met expectations. Its 9MFY24 core net profit jumped 69% driven by strong solar EPCC billings and maiden profits from its LSS4 plants. Recently unveiled LSS5 and new net energy metering (NEM) quota are another shot in the arm for solar EPCC players. We maintain our forecasts but lift our TP by 28% to RM1.88 (from RM1.47). Maintain OUTPERFORM.

Its 9MFY24 core net profit of RM25m met expectations at 81% and 83% of our full-year forecast and the full-year consensus estimate, respectively.

YoY, its 9MFY24 revenue surged 57% driven by: (i) acceleration in solar EPCC work progress (+4%) under LSS4, (ii) maiden contribution (+766%) from its two LSS4 plants located in Perak (29.6MWp) and Selangor (20.5 MWp), and (iii) higher O&M activities (+100%). Its core net profit grew by a steeper 69% on improved cost management.

QoQ, its 3QFY24 revenue fell 20% as EPCC works for LSS4 projects were already at the tail-end. However, its net profit soared 48%, we believe, due to lower panel prices and lumpy profit recognition on account closure for certain projects.

LSS4 assets kick in timely. Going forward, SLVEST’s earnings growth will be driven by the full-year contribution from its 67.3MWp of solar power plants under LSS4. In addition, SLVEST has secured orders for approximately 116MWp (+5% QoQ) through is solar project financing scheme Powervest, translating to a total revenue of RM41m annually.

Recall, Powervest has an internal rate of return (IRR) of at least 12% vs. 8% under LSS projects.

Outlook. The prospects of the solar energy sector are well supported by the National Energy Transition Roadmap (NETR) which sets an ambitious target of RE to make up 70% of total power generation capacity by 2050. In line with the roadmap, the Energy Commission is embarking on LSS5 with a quota of 2GW and a developer is now allowed to bid for up to 500MW (vs. only 50MW previously). Given its experience in LSS4, SLVEST is poised to garner a slice of action in this new initiative by the Energy Commission. We estimate that LSS5 will generate some RM5b worth of works for solar EPCC players, which will keep the sector busy until 2028.

Furthermore, an additional quota of 400MW under the NEM initiative from Feb to Dec 2024 will continue to facilitate investment by businesses in solar energy generation assets. Recall, businesses in general, driven by commercial reasons (i.e. to save cost) and ESG considerations, have voluntarily invested in solar energy generation assets following the recent hikes in electricity tariffs.

Forecasts. Maintained.

Valuations. However, we lift our TP by 28% to RM1.88 (from RM1.47) as we roll forward our valuation base year to FY26F (from FY25F) based on SoP valuation, valuing its EPCC segment at 30x FY26F PER, in-line with the average historical 1-year forward PER of the solar EPCC sector; and its LSS4, CGPP and Powervest assets by discounted cash flow (see Exhibit 1). Note that our TP reflects a 5% premium given a 4-star ESG as appraised by us (see Page 5).

Investment thesis. We like SLVEST for: (i) the bright outlook of the RE market in Malaysia, underpinned by the government’s strong commitment towards RE, the export potential of RE and the increased commercial viability of solar power projects on falling solar panel prices, (ii) its strong market position, execution track record, clientele and value proposition of its PV system financing programme, and (iii) its strong earnings visibility backed by a sizeable outstanding order and tender books, and recurring incomes from a growing portfolio of solar assets. Maintain OUTPERFORM.

Risks to our call include: (i) the government dials back on RE policy, (ii) influx of new players in the EPCC space, intensifying competition, and (iii) escalation in project costs.

Source: Kenanga Research - 29 Feb 2024