Malaysia: Cypark expanding renewable energy segment

Malaysia: Cypark expanding renewable energy segment

Cypark Resources Bhd's waste-to-energy (WTE) project in Ladang Tanah Merah
(LTM), Negeri Sembilan, is expected to be completed by end-calendar year
2017 (CY17). Hence, we are expecting earnings contributions from its
renewable energy (RE) segment to improve from CY18, through the sale of
electricity from its 20MW biomass and 5MW biogas facilities. This is
expected to generate about RM65 million additional revenue per year from the
biomass plant, translating into profit of about RM15 million, which we had
already previously accounted for.

There will also be tipping fees collected from maintaining the sanitary
landfill site in LTM, which will be paid by the government. We estimate the
tipping fees at around RM30 for every tonne of municipal solid waste (MSW)
received. We reckon LTM received about 500 tonnes of MSW in the financial
year ended Oct 31, 2016 (FY16) due to it being in the early stages.
Nevertheless, waste-related growth is expected to increase going forward due
to ongoing and future township developments within the proximity of LTM. The
company currently targets to receive about 1,000 tonnes of MSW per day.

We understand that Cypark is submitting tenders for the second bidding of
the Large Scale Solar (LSS) programme under the purview of the Energy
Commission (EC), which is expected to be commissioned between 2019 and 2020.

As the EC has allocated a higher target aggregate capacity of 360MW of solar
development in Peninsular Malaysia (compared with 200MW in the first
competitive bidding last year), we believe Cypark stands a good chance due
to its pioneering status and technical expertise as a solar developer and
operator. Cypark's RE segment contributed about 16.5% of total revenue in
FY16, and is expected to increase to more than 30% from 2018. Management
targets more than RM300 million of recurring revenue under the RE segment by
2020.

The environmental enginnering (EE) segment involves landfill closure and
restoration, waste management and operation, development of solar plants and
other waste-related projects. The current main contributor in EE is the
construction of the WTE project. With the completion of the WTE project by
year end, Cypark has managed to secure few other contracts to replenish its
segmental order book. To recap, it secured a 15-month landfill closure
contract in Pajam at a contract value of RM15.2 million in January 2017. It
also received a contract for leachate treatment operations for three
landfills in Negeri Sembilan and Pahang at a contract value of RM28.5
million in March 2017. Besides, Cypark has also recently secured a project
to develop an LSS plant of about 15MW with a contract value of RM75 million.

However, we make no adjustment to our earnings estimates as they form part
of our replenishment assumptions of more than RM100 million per annum for
the coming years.

Revenue for the first half of FY17 (1HFY17) increased by 11.9% year-on-year
(y-o-y) to RM162.4 million, driven by higher EE-related contribution
(+36.9%), which was mainly contributed by higher construction revenue in
WTE. Its landscaping and infrastructure segment contracted 42.7% y-o-y to
RM18.5 million due to completion of certain projects and lower work
activities for new projects, which were at early stages. Meanwhile, 1HFY17
net profit declined by 9.9% to RM22.9 million. Excluding a one-off employee
share option scheme (Esos) expense of RM5.2 million incurred in the second
financial quarter ended April 30, 2017, core net profit was RM28.2 million
(+10.5% y-o-y). The results were below our expectations, but in line with
consensus full-year estimates, accounting for 45.5% and 50.4% respectively.

We lower our earnings estimates by an average of 13.3% for FY17 to FY19 to
account for the one-off ESOS expense in FY17 and higher amortisation costs
for the WTE project. We also adjust our price-earnings ratio multiple for
the non-RE segment, which is mostly construction-related, to nine times
(previously six times), which is the average multiple for other construction
companies (between nine times and 10 times). As a result, our new
sum-of-parts-based TP is lowered slightly to RM2.62 (previously RM2.64),
yielding a potential return of only 1% from the current price. Rerating
catalysts could however come from new solar projects and a potential second
WTE plant in LTM within the next three to four years' time.

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Link to Original Article:
http://www.theedgemarkets.com/article/cypark-expanding-renewable-energy-segm
ent

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com