Maybank Investment Bank Bhd (Maybank IB) has upgraded its rating for Cypark Resources Bhd to “BUY” based on the anticipated total return of +18%, which aligns with their unchanged Sum-of-Parts Target Price (SOP-TP) of RM1.05.
This target price implies a valuation of 20 times the estimated earnings for year 2024 and 12 times the estimated earnings for 2025.
Maybank IB highlighted in it research report on Oct 4 the key takeaways from the recent meeting between the research house and Cypark.
The completion of three ongoing Liquefied Stabilized Soil (LSS) construction projects in Terengganu and Kelantan is targeted for December 2023; the waste-to-energy (WTE) project is expected to achieve optimal operation by December 2023; there is a possibility of revising tipping fees; and Cypark plans to expand its Renewable Energy (RE) segment, either through Engineering, Procurement, Construction, and Commissioning (EPCC) works or asset ownership.
Maybank IB did not make changes to its forecasts.
WTE to achieve optimal operation in December 2023
WTE segment is expected to achieve optimal operation in December 2023 Cypark’s 19.73 megawatt of alternating current (MWAC) WTE plant at Ladang Tanah Merah, Negeri Sembilan was commissioned on Dec 14, 2022.
In the first quarter of 2024 (1Q’24), its waste and WTE segment posted RM10 million in revenue and RM6.2 million in pre-tax loss as WTE revenue from the sale of green energy underdelivered due to the WTE plant being at the initial stage of operations.
The plant is now undergoing system upgrading and technical improvements and is expected to operate at optimal capacity by December 2023.
By then, the waste and WTE segment is expected to generate RM80 million in revenue which covers tipping fee, recycling revenue and green energy sale to Tenaga Nasional Bhd.
We understand that Cypark’s recent perpetual sukuk issuance of RM265 million, subscribed by Jakel Capital will be use to part finance this capital expenditure (capex).
Potential higher tipping fees in upcoming review
Management has been liaising closely with the authorities on the tipping fee review.
Accordingly, the group has submitted for higher tipping fees based on feedback from the authorities. There will be two parts to the fee revision, operation expenditure (opex) and capex.
The opex part is targeted to be approved by November 2023 while the capex part by April 2024.
Cypark now receives a tipping fee of RM33/MT of municipal solid waste for operating and maintaining the sanitary landfill.
To further expand on its RE segment
As Cypark focuses on completing its LSS2 and LSS3 projects, it is also exploring new RE related opportunities with several states.
On Aug 1, 2023, it entered into a Memorandum of Business Exploration with RGFC Ventures Sdn Bhd to provide solar energy solutions across the state of Selangor, focusing on floating and residential solar.
It also looking at Sarawak to expand its RE operations (via EPCC works or asset ownership).
Further opportunities are from the remaining 237 megawatts (MW) of Corporate Green Power Programme (CGPP) yet to be awarded and RE export.
Value Proposition Cypark engages in renewable energy, construction and engineering, green tech and environmental services, as well as waste management and waste-to-energy businesses.
It currently own, operate and manage 19 domestic solar photovoltaic (PV) farms with total 72 MWAC installed capacity. Cypark expects to expand its solar PV generation to 232MWAC by end-2023.
It also owns and operate the first WTE plant in Malaysia located in Ladang Tanah Merah, Negeri Sembilan, generating 19.73 MWAC of electricity.
Financial Metrics
Earnings in the financial year 2024 to 2026 to be supported by RE and WTE segments, mainly from increase in solar PV generation capacity and commencement of its first WTE plant, that has stable cashflow streams.
Net gearing stood at 1.3x as of end-July 2023, where 90% of its borrowings were project financing.
Price Drivers
- Implementation of Movement Control Order (March 2020).
- Signs PPA agreement with TNB for LSS3 project (May 2020).
- Secures FiT for 51% biogas project at Ulu Remis, Johor (March 2021).
- To commercially operate SMART WTE plant (February 2023).
- Secures construction project for a 10-storey private hospital together with a 6-storey parking lot from Selgate (April 2023).
Swing Factors, on the upside, include sizeable job wins from EPCC work for future CGPP, other rooftop project roll-outs or RE export; growing portfolio of power generation capacity such as solar PV, biogas, and biomass and securing more WTE projects.
On the downside, the factors involved were cited as delays in commencement of its new solar assets could affect timing of earnings and cash flow recognitions, unplanned outage at WTE could result in higher-than expected maintenance expense, weather conditions could affect income from sale of electricity and increase in price for solar panels and inverters could affect its solar project margins.
Business Model and Industry Issues
RE has always been Cypark’s core business strategy as it is involved in various forms of RE business, namely solar, WTE, biogas, and biomass.
To-date, the group’s RE parks has generated 404.75 Gigawatt hours (GWh) of electricity, which reduce level of carbon dioxide (CO2) by 279,278 tonnes.
Cypark’s RE parks focus on the use of non-productive and non-commercial areas such as on landfill areas and rehabilitated landfill areas which will not involve any additional land acquisition and tree and vegetation clearing throughout the park creation process.
To-date, it has successfully transformed 888 acres of non-productive, abandoned and degraded areas into environmentally-friendly RE projects.
It will continue to build its RE portfolio to 232 MWAC of solar by 2023, from 72 MWAC of solar and 20 MWAC of WTE currently.
Material E issues
The group’s development of RE parks produce zero greenhouse gas (GHG) emissions through the usage of nonproductive and non-commercial areas, for example, on water bodies, landfill areas and rehabilitated landfill areas.
In financial year 2021, the group’s RE parks, which are in commercial operations, have successfully avoided the emission of 41,573 tonnes of CO2 while generating 60,251 megawatt hour (MWh) of renewable energy (In financial year 2020 totalling 41,933 tonnes CO2, 60,772MWh).
Cypark expect to increase its RE capacity to 232MWAC of solar by 2023, from 72MWAC of solar and 20MWAC of WTE currently.
