SLVEST’s FY24 results met expectations. Its FY24 core net profit jumped 64% YoY driven by strong deliveries of solar EPCC jobs, low solar panel cost and sale of electricity. We expect a strong job flow in coming months from the Corporate Green Power Programme (CGPP) and a new quota of 400MW under the Net Energy Metering (NEM) initiative. We maintain our forecasts, TP of RM1.91 and OUTPERFORM call.

Its FY24 core net profit met expectations.

YoY, its FY24 revenue jumped 35% on improved performance across the board, driven by: (i) the completion of EPCC jobs (+26%) under LSS4, (ii) sale of electricity (+530%) from its three LSS4 plants with a total installed capacity of 67.3MWp, and (iii) higher O&M activities (+47%). Its core net profit grew by a steeper 64% mainly driven by strong profits from electricity sales and low solar panel cost.

QoQ, its 4QFY24 revenue fell 14% as LSS4 projects were at the tail end. Its core net profit fell by a steeper 27% due to higher administrative expenses which offset lower solar panel cost and a better product mix skewed more towards high-margin rooftop projects vs. low-margin LSS jobs.

New wave of solar EPCC jobs. We understand that SLVEST’s outstanding order book of RM242m fell 56% YoY having completed the LSS4 projects. However, we foresee a strong job flow over the immediate term driven by the 800MW CGPP with an end-2025 completion deadline and an additional 500MW quota under the NEM initiative. Its earnings growth will be driven by the full-year contribution from its 67.3MWp of solar power plants under LSS4 and incomes to the tune of RM38m annually from projects with a combined capacity of 109MWp from multiple corporate power purchase agreements (PPA) under its Powervest solar project financing scheme. Recall, Powervest has a hurdle internal rate of return (IRR) of at least 12% for these projects vs. a typical 8% IRR for LSS projects.

Outlook. The 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.

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.

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. We maintain our FY25F forecasts and introduce our FY26F numbers.

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 strong market position, execution track record, clientele and value proposition of its PV system financing programme, and (iii) its strong earnings visibility backed by a sizeable outstanding order and tender books, and recurring incomes 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 - 31 May 2024