Despite rising cost pressures, management expects earnings to remain resilient this year on the back of solid balance sheet and steady cash flows from the renewable energy business. During the virtual briefing, management also shared that they are currently exploring opportunities in some renewable energy projects in the region, where they are familiar, which could be a re rating catalyst for the group. Maintain Outperform call with an unchanged SOP-based TP of RM4.75.

• Observing decreased water levels during a dry spell. Recently, Laos broke the national record for highest temperature across all cities amid an unprecedented heat wave, reaching 43.5 degree Celsius. The water level at the Pakse substation dropped to its present level of 1.4m, which is considerably lower than the 4.77m of 2022 and the long-term average of 2.73m. The drastic drop in water level could have resulted in a lower usage in energy availability factor for 2Q. April and May are typically the hottest months of the year for the region as temperatures rise before annual monsoon rains bring some relief. On the positive side, it has received 1% hydro tariff adjustment to 6.34 US cents until the 10th year before seeing a drop to 5.7-5.8 US cents for the 11th-20th years and followed by a 1% hike till the end of the concession. Strengthening of the US dollar is also expected to help offset the impact of lower hydro generation.

• Limestone benefits from robust mining activities. Riding on the robust lithium, nickel and copper mining activities in Indonesia, spurred by the electric vehicle boom, there is a strong demand for the limestone. It is worth noting that export markets made up 2/3 of its sales volume, driven by the mining and infrastructure developments in the region.

• Packaging under margin pressure. The packaging division is expected to face headwinds from high supply chain inventory and slowing consumption demand, which resulted in intensifying price competition. It also faces heightening cost pressure on increasing labour and electricity costs. On the positive side, material costs, which made up about 50-60% of the total production costs, have seen corrections by more than 20%.

• Tough time for oleochemical. The JV-owned oleochemical business is expected to remain loss-making in the 2Q in view of the current weak palm oil product prices, namely, CPO, palm stearin and CPKO. Apart from that, it also faces some human resource and production reliability issues, which hinder them from ramping up on production efficiency and capacity utilization. Nevertheless, it still remains cash flow positive.

• Conserving capital to prepare for new opportunities. As of 1QFY23, net gearing ratio remains low at only 3.4% with a net debt of RM111m. The outstanding loan for the hydropower plant currently stands at USD87m (RM400m) with an interest rate of 5.21%. It had spent RM33.3m for capex, RM7.7m for strategic investment (RM2.3m for 28.8%-owned Integrated Smart Technology and RM5m for new food platform in Malaysia via preference share subscription) and RM11m for financing costs.

Source: PublicInvest Research - 8 Jun 2023