SLVEST’s 1QFY25 results met expectations driven by higher- margin projects in the C&I sectors and full electricity sales contribution from its LSS4 plants. Its prospects remain promising, underpinned by the government’s commitment towards renewable energy. We expect its order book to be replenished in the upcoming months through the Corporate Green Power Programme (CGPP) and Net Energy Metering (NEM) initiatives. Its results have outperformed peers and given unchanged industry outlook, its recent share price weakness may present accumulation opportunities. We maintain our forecasts, TP of RM1.91 and OUTPERFORM call.

More jobs in 2H. Its 1QFY25 core net profit of RM7.8m came in at only 15% and 17% of our full-year forecast and full-year consensus estimate, respectively, whereas the weaker 1HFY25 was not unexpected due to completion of LSS4. Moreover, with a busier 2H anticipated for solar EPCC players mainly driven by the CGPP's tight deadline for completion by end-2025, we deem the result in line.

YoY, its 1QFY25 revenue dipped 49% due to the completion of LSS4 projects. However, its core net profit rose 17% mainly driven by improved margins in the commercial and industrial business segment and full contribution from electricity sales from its three LSS4 plants.

QoQ, similarly, its 1QFY25 core net profit inched up by 1% despite a 25% drop in revenue, thanks to a better product mix with a greater focus on high-margin rooftop projects for residential, supported by the Solar For Rakyat Incentive Scheme (solaRIS), offering rebates ranging from RM1,000/kWac to RM4,000.

A new heat wave of solar EPCC jobs. We expect a strong influx of job opportunities in the immediate term, driven by the 800MW CGPP with an end-2025 completion deadline and an additional 500MW quota under the NEM initiative. Based on our estimates, we expect SLVEST to stand a strong chance to secure at least 30% translating to RM720m of the total PV system EPCC jobs under CGPP, of which we estimate at RM2.4b. Currently, its current order book stands at RM469m (CGPP: ~50%, C&I: ~50%) (+93%, QoQ).

Outlook. 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 2027. Additionally, the recently unveiled Corporate Renewable Energy Supply Scheme (CRESS), expected to see at least 2GW of applications, will further boost the solar EPCC sector.

There is also an additional quota of 400MW (residential: 100MW; commercial: 300MW) from Feb to Dec 2024 under the Net Energy Metering (NEM) initiative, coupled with the Solar For Rakyat Incentive Scheme (solaRIS) (using the additional 100W NEM quota for the residential segment) where participants will be offered rebates ranging from RM1,000/kWac up to RM4,000/KWac. 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. We maintain our TP of RM1.91 based on SoP valuation, ascribing 30x FY26F PER for its EPCC segment (in line with the average historical 1-year forward PER of the solar EPCC sector) and DCF at a discount rate of 5.5% to 5.6% for its LSS4, CGPP, and Powervest assets (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 dominant market position with a market share of over 30% in the solar EPCC space, 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 solar panel prices and other project costs.

Source: Kenanga Research - 2 Sep 2024