• Keep NEUTRAL and SOP-derived MYR0.77 TP, 3% upside. 1HFY23’s (Mar) core profit, which grew by five-fold to MYR9.0m, was within expectations, buoyed by the recognition of the Large Scale Solar 4 (LSS4) construction progress without the movement restriction constraints despite at a lower margin and higher input costs. Solarvest’s outstanding orderbook remains robust at MYR662m (1.5x cover). However, the current demand for for commercial & industrial (C&I)-related projects remain slow due to the instability of solar panel prices and strength in the USD.

• Within expectations. 1HFY23 revenue of MYR150.8m (+184.7% YoY) and core profit of MYR9.0m (+5.5x YoY) came in at 46.9% and 42.7% of our and consensus full-year forecasts. The better profitability YoY was aided by better margin (EBIT margin at 9.8% vs 5.3%) on better economies of scale on significantly higher revenue despite lower GPM for the LSS4 projects. This more than offset the higher administrative expenses from the additional cost of a new office and higher payroll costs from a higher headcount.

• The sequentially weaker bottomline of MYR4.2m (-12% QoQ) was due to the high base effect in 1QFY23 amid recognition of the higher margin of design and engineering consulting works in the large-scale solar (LSS) projects despite the stronger revenue of MYR98.2m (+86.4% QoQ, +224.8% YoY) achieved in the current quarter under review. All the performance metrics improved YoY, given the low base effect as construction activities in 1QFY22 were still affected by various movement restrictions.

• The launch of Corporate Green Power Agreement (CGPA). The existing outstanding orderbook of MYR662m is set to cover the company’s revenue for the next 1.5 years. Looking ahead, Solarvest is aiming to capitalise on the 600MW of solar photovoltaic assets quota release under the CGPA recently, which will be based on virtual power purchase agreements (VPPA) instead of the reverse bidding previously. We expect more development from this new quota of green electricity supply come 2QCY23. That said, we remain cautious on the demand from potential customers on the back of volatility of raw material prices and unfavourable FX movements due to high inflation and ongoing supply chain disruptions.

• Forecasts and TP. Our earnings forecasts and SOP-derived TP (Figure 2) are unchanged at MYR0.77. Our TP also incorporates a 6% ESG premium given that Solarvest’s 3.30 ESG score is above the country median.

• Key risks to our call include higher/lower-than-expected contract wins, unexpected changes in project costs, and progress of its overseas ventures in Taiwan and the Philippines.

Source: RHB Research - 30 Nov 2022