• Keep BUY and MYR1.67 TP, 10% upside. We are optimistic about Coastal Contracts' announcement of its maiden solar project, marking its entry into the renewable energy (RE) sector and diversifying its revenue stream. This strategic move into green energy aligns with the sector's promising growth outlook, underpinned by initiatives like the Corporate Renewable Energy Supply (CRESS) scheme and Malaysia's National Energy Transition Roadmap (NETR).
• First solar project. The group's wholly-owned subsidiaries, Coastal Solar and Pleasant Engineering, together with Bina HT as part of a consortium, have secured a letter of notification on acceptance of offer (LON) from the Energy Commission of Sabah. The consortium will develop a large-scale solar photovoltaic (PV) plant with a capacity of 15MWac on the east coast of Sabah, with COCO having an effective stake of 95%. The solar power purchase agreement (PPA) with Sabah Electricity will span 25 years, with the commercial operation date (COD) scheduled between 1 Apr 2027 and 30 Jun 2027.
• Potential earnings contribution. While details of the PPA are yet to be finalised, management estimates the project's internal rate of return (IRR) to be around 10-12%. The higher IRR could be attributed to potentially better tariffs, as Sabah historically offered higher rates under the Large Scale Solar 2 (LSS2). The general solar capex requirement is around MYR2-2.5m/MWdc, translating to a total investment of MYR45-56m for the 15MWac plant and funding is expected to be structured with an 80:20 debt-to-equity ratio. Based on these parameters, we estimate the project to generate earnings of MYR2-3m pa.
• We maintain our earnings estimates for now, as contributions from this project are only expected from 2027. Our MYR1.67 TP is based on an unchanged 6x FY25F P/E (-1.5SD from its historical mean) and is inclusive of an 8% ESG discount. We view this positively as COCO ventures into green energy while diversifying its income stream, which is in line with its stated strategy. The group has been proactively building a dedicated team to support its transition into the RE sector, ensuring it has the expertise to capitalise on emerging opportunities. Currently, its main income contributor is Petroleos Mexicanos (Pemex), which poses concentration risks should there be any adverse developments. This timely entry into the RE sector aligns well with the industry's growth trajectory, supported by robust initiatives introduced by the Government. Additionally, the general >15-year PPAs also provide long-term income visibility. As a Sabah-based company with a solid financial position, COCO has the advantage to leverage on similar opportunities and potentially acquire additional RE assets in the future, in our view.
• Downside risks include contract cancellations, slower-than-expected progress billings, and rising costs.

Source: RHB Research - 24 Dec 2024