• MYR0.72 FV based on 15x FY26F P/E. Northern Solar aims to raise MYR42.4m from its IPO, primarily to fund its working capital to expand its portfolio in the EPCC of solar photovoltaic (PV) systems. We project a 3-year earnings CAGR of 28.1%, driven by Malaysia's target of achieving a 70% renewable energy (RE) mix by 2050, which is expected to significantly boost solar adoption.
• Business overview. Northern Solar primarily engages in the EPCC of solar PV systems, RE generation, and operation & maintenance (O&M) of solar PV equipment and systems. The group mainly operates within the domestic solar PV industry. As of the latest practicable date (LPD), it has installed a total capacity of 71.9MWp across residential and commercial & industrial (C&I) buildings.
• Expansion plans. Northern Solar is allocating 68.8% of the IPO proceeds for working capital purposes, including the recruitment of engineering and business development personnel, and procurement of project materials. By utilising these funds to meet working capital needs associated with contract works, the group will enhance its capacity to tender for projects and expand its portfolio in the EPCC of solar PV systems segment, in our view.
• Forecasts. We forecast Northern Solar's revenue to grow at a 3-year CAGR of 26.7%, primarily driven by increasing orders from its C&I customers - in line with the country's commitment towards energy transition. As of 19 Nov 2024, the group's orderbook stood at MYR83.2m, which is expected to be recognised within 12 months. Northern Solar also has a strong tenderbook of MYR1.3bn. A potential upside lies in its partnership with Lagenda Properties, which has not yet been factored into the tenderbook and orderbook figures. We have also assumed a net margin of 17.1% for FY25, supported by strong gross profit margins - driven by declining panel prices. However, we expect net margins to moderate to 13.9% and 12.5% in FY26 and FY27, resulting in a 3-year earnings CAGR of 28.1%.
• Valuation. We ascribe a 15x P/E to the group's FY26F earnings to arrive at a FV of MYR0.72. Our selected peers are either involved in solar EPCC and/or RE generation. Excluding Mega First Corp (MFCB MK, NR), which is primarily an asset owner, companies involved in the solar EPCC space generally trade at a P/E range of 14-23x. Our target P/E is positioned at the lower end of this range, reflecting Northern Solar's smaller market cap and exclusive focus on C&I EPCC projects. While its earnings base is comparable to Samaiden Group (SAMAIDEN MK, BUY, TP: MYR1.62), the lower target P/E accounts for its lack of involvement in the utility-scale segment.
• Key risks: Slow replenishment of its orderbook, dependence on government policies on RE, and higher-than-expected project costs.

Source: RHB Research - 17 Jan 2025