• MYR0.46 FV, based on 21x FY25F P/E. Solar District Cooling Group (SDCG) aims to raise MYR45.1m from its IPO, primarily to fund material purchases and working capital for business expansion. We forecast a 3-year earnings CAGR of 22%, supported by strategic expansion, rising demand for energy efficiency, and strong recurring revenue.

• Business overview. SDCG is principally involved in the provision and maintenance of building management systems (BMS), solar thermal systems, and energy-saving services. It also provides maintenance services for other systems and equipment. Malaysia is its primary market, accounting for 99.5% of FY23 revenue. Key clients include construction companies, facilities management firms, concession companies providing public hospital support services and others.

• Expansion plans. The group has allocated MYR18.7m of its IPO proceeds to purchase new tools, equipment, and vehicles for the BMS and solar thermal systems segments. These resources will enhance productivity and service delivery for systems integration and maintenance of BMS, as well as installation and maintenance of solar thermal hot water systems, both as part of energy performance services and standalone projects. SDCG also plans to purchase a specialised solar photovoltaic (PV) system design software that is used to design solar PV systems as it intends to address opportunities in the market. Additionally, MYR1.9m has been earmarked to expand its headquarters to support its growing operations.

• Forecasts. We forecast SDCG’s revenue to grow at a 3-year CAGR of 23.6%, driven by the BMS and solar thermal systems and energy-saving services segments. This growth is fueled by opportunities in retrofitting existing buildings and new construction projects. With seven energy performance service contracts for hospitals, the group is well-positioned to capture more business from the 160 public hospitals in operation. It also plans to expand into the private hospital sector, data centers, and other building types. We expect additional project wins as it aggressively pursues private and government contracts, supported by increased cash flow for tender and performance bonds. Assuming an NPM of 21-23%, we project a 3-year earnings CAGR of 22%.

• Valuation. We ascribe a 21x P/E to the group’s FY25F earnings to arrive at a fair value of MYR0.46. The 21x P/E ratio is in line with the weighted industry average of its selected peers but at a 5% premium to its closest peer, KJTS Group (KJTS MK, NR), which we believe is justified given the former’s business model fetches a higher margin (FY23: 22.9%) compared to the latter’s (FY23: 6.8%.).

• Key risks include inability to secure new and sizeable projects, and early termination or suspension of contracts.

Source: RHB Securities Research - 6 Sept 2024