SLVEST's 1HFY25 results met expectations with stronger performance expected in 2HFY25 backed by a record high outstanding order book of RM961m. The order book is poised for further replenishment in the upcoming months through the Corporate Green Power Programme (CGPP) and Net Energy Metering (NEM) initiatives. Its growth prospects remain robust underpinned by the government's strong commitment to advancing renewable energy. We maintain our forecasts, TP of RM1.91 and OUTPERFORM call.

Stronger 2H. Its 1HFY25 core net profit of RM17m came in at only 32% and 37% of our full-year forecast and full-year consensus estimate, respectively. However, we deem the results within expectations in anticipation of a stronger 2H, to be boosted by the CGPP's tight completion deadline by end-2025.

YoY, its 1HFY25 revenue fell 38% due to the completion of LSS4 projects, which were still actively ongoing in the same period last year.

However, its core net profit rose 23% supported by stronger margins mainly due to: (i) lumpy profit recognition from CGPP project account openings, (ii) robust margins from ongoing projects, particularly in the commercial and industrial segment, (iii) full contributions from electricity sales generated by its three LSS4 plants, and (iv) lower solar panel prices.

QoQ, its 2QFY25 net profit grew 17% as work progress for EPCC jobs accelerated from CGPP projects.

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 RM961m (CGPP: 70%, C&I: 30%) (+105%, 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 income 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 - 26 Nov 2024