OCK plans to invest in Solarpack Asia Sdn Bhd (SPKA) via redeemable preferential shares (RPS). SPKA owns 49% in a 116MW large-scale solar (LSS) plant in Kedah. This deal values SPKA at an indicative enterprise value of RM350m. While we can understand OCK's motivation to foray into the renewable energy industry, we are negative on this deal, mainly due to absence of key information and low visibility on RPS investment returns. As we will only be able to accurately assess this deal's financial impact when more details, including investment outlay, are finalized and revealed, for now we keep our forecasts, TP of RM0.45 and MARKET PERFORM call.

Also taking over a loan. OCK has entered into an agreement with Zelestra Corporacion (Zelestra) for the following: (i) investment in 1,000 RPS in SPKA; and (ii) assumption of a loan extended by Zelestra to JKH Renewables Sdn Bhd (JKH). OCK will settle the following in cash to Zelestra upon closing this deal (target 2Q25): (i) final subscription amount for the RPS; and (ii) outstanding principal amount of RM14.2m on the loan novated from JKH.

Plant is up and running. SPKA and JKH have a 49% and 51% stake respectively, in Solarpack Suria Sungai Petani Sdn Bhd (3SP), the developer, owner and operator of an LSS plant in Sungai Petani, Kedah. 3SP secured a 21-year power purchase agreement (PPA) with TENAGA, awarded under Malaysia's Large-Scale Solar 3 (LSS3) scheme which is due for expiry in March 2043. 3SP's plant achieved commercial operation in March 2022.

Will likely gear up to fund this investment. OCK will settle the consideration via internal funds and/or bank borrowings, Following the proposed investment, OCK's borrowings are expected to increase by RM91m, which is estimated to raise its gross gearing slightly from 1.04x in FY23 to 1.15x.

Exhibit 1: Snapshot of SPKA/3SP's Financials s (RM m) 2022 2023 Revenue 33.2 40.6 PBT 3.6 3.3 Tax* -4.4 27.2 PAT -0.8 30.5 MI 0.7 -15.2 RPS not exactly a sweet deal. Salient terms of the RPS include: (1) non-convertible with no maturity date; (2) OCK is entitled to receive preferential dividends, taking priority over ordinary shareholders; (3) OCK's rights are limited to the preferential dividends and do not extend to other surplus profits or assets of SPKA; (4) dividend payments on the RPS are subject to the approval of SPKA's board of directors; (5) SPKA cannot pay dividends to ordinary shareholders until all dividends and redemptions due on OCK's RPS are fully settled; (6) OCK has limited voting rights at SPKA's general meetings; AND (7) protective provisions to safeguard the rights of RPS holders include restrictions on SPKA regarding the creation of senior securities, modification of ordinary shareholder rights, and issuance of non-uniform equity shares.

Meanwhile, key conditions for the redemption of OCK's RPS include: (1) SPKA can redeem OCK's RPS at any time with a minimum of three days' notice; (2) SPKA can choose to redeem all or a portion of the RPS; (3) redemption must be funded from profits or a new share issue; (4) payments for redemption are in cash; and (5) redeemed RPS cannot be reissued.

Boost to solar assets managed by OCK. Zelestra, a Spanish renewable energy (RE) developer and owner, was founded in 2005.

It has developed over 27GW of RE plants, and currently owns, or is building 24 plants with a total capacity exceeding 1.9GW across Spain, Chile, Colombia, Peru, Malaysia, the US, and India. Zelestra is majority-owned by the Swedish infrastructure fund manager EQT. Meanwhile, OCK currently owns and manages approximately 29 solar generation assets in Malaysia. Hence, this investment in 3SP will increase the total solar generation assets managed by OCK.

Many question marks at this point. At this juncture, we are negative on this deal, driven in part by the lack of key material information with clarifications needed on the following: (i) final investment amount of the RPS after accounting for the loan consideration, working capital, cash and debt; (ii) anticipated return from the RPS' preferential dividends in the short and long term; (iii) extent of OCK's involvement in 3SP and SPKA's operations; (iv) 3SP and SPKA's current and future EBITDA generation potential; and (v) visibility on SPKA's preferential dividends and distribution policy. We will reassess this deal and its financial impact when more details come to light.

Low visibility on preferential dividend payout. Additionally, we are concerned about the potential for future dividends given tepid FY23 PBT of RM3.3m after a full year of stable operations at 3SP's plant. At this juncture, we would have preferred legal comfort that OCK can exert some control over SPKA or 3SP, notwithstanding the fact that OCK may participate in 3SP's economic benefits via its RPS investment. Moreover, distribution of preferential dividends is subject to SPKA's discretion, thus limiting visibility on RPS returns. However, this is partly mitigated by the requirement that SPKA cannot pay dividends to ordinary shareholders until all RPS dividends and redemptions are fully settled.

Forecasts. Maintained.

Valuations. We also keep our TP of RM0.45 based on unchanged 5.7x FY25F EV/EBITDA. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Maintain MARKET PERFORM.

Investment case. OCK's near-term earnings may may benefit from potential new contracts in these areas: (i) power solutions for DCs; (ii) new digital business (solutions for cloud, smart cities, connectivity and managed solutions); and (iii) 5G network rollouts at Laos (new venture), Vietnam and potentially Indonesia soon.

However, OCK's core TNS business continues to face headwinds, with sluggish order book replenishment and declining outstanding orders as the first 5G network nears completion. While the recent award of the second 5G network (NW2) to U Mobile is a positive development, its roll-out may encounter delays. U Mobile must first finalize additional mobile network operator (MNO) partnerships, appoint a 5G advanced technology vendor, and secure financing, among other preparatory steps. Moreover, the unveiling of the official 5G dual network policy will be crucial to clarify NW2's coverage targets and access arrangements with other MNOs.

Risks to our call include: (i) unfavorable regulatory changes; (ii) prolonged delay in roll-out of second 5G network and JENDELA Phase 2; and (iii) country and political risks at frontier markets where OCK has a presence.

Source: Kenanga Research - 11 Dec 2024