We are excited on the update that the new Power Purchase Agreement (PPA) and Concession Agreement (CA) are going to be completed by the end of this year after receiving the approval from the Lao's National Assembly Standing Committee last month. This could potentially re-rate our valuations by up to 5% as the concession period will reset along with some changes. Any form of tax incentive given will be a positive surprise for us as we currently apply a standard corporate tax rate in our valuation model. Management also indicated the possibility of more aggressive dividend payouts going forward as it sees strengthening operating cash flows with fewer capital commitments except for Corporate Green Power and LSS5 solar projects. Pending the completion of the new PPA and CA, we retain our Outperform call with an unchanged SOP-based TP of RM5.36.

• The new PPA and CA structure. The new PPA and CA will include all 5 turbines at a more flattened tariff rate throughout a new 25-year period. Though it will lose its tax-free stature, it is still entitled to some tax incentives. Under the deal, the Don Sahong Hydro Power Plant has also front-loaded USD100m (RM445m) to secure the water river rights, which means there will be no recognition of royalty charge (current royalty: USD7m p.a.) throughout the new concession period. To resolve the long outstanding receivables estimated at USD60m (>5 months), which represent the remaining 10% electricity tariff proceeds in local KIP currency from EDL, there is a plan to convert it into a loan package, and EDL is required to service the USD loan repayment on a monthly basis. This will also help reduce the receivable turnover to a healthy level of 2 months. The annual amortisation charges of the service concession asset will be significantly brought lower under the new CA as the current book value will be capitalised based on a new 25-year concession period. Also, each of the existing turbines will undergo 3-month overhaul maintenance starting next year at an expense of RM12-13m per turbine. We estimate that the new PPA and CA could potentially bump up our FY25-26F core earnings forecast by less than 5%, assuming we expect the effective tax rate to be at 15% (vs Laos' corporate rate: 24%) and the average tariff rate remains.
• Other key highlights. Management has set its sights on turning around oleochemical and food security segments in FY25. The JV-owned oleochemical business, Edenor and food security segments incurred a 9MFY24 pre-tax loss of RM30.2m and RM3.7m, respectively. The capacity utilisation of the oleochemical business in Telok Panglima Garang is expected to stabilise after adding a new boiler. Meanwhile, the CSC Agriculture business in Malaysia is expected to see the biggest sales contribution coming from the durian in Ulu Tiram farm, while the coconut sap syrup business in Thailand has received strong demand from F&B companies. Management has also voiced its intention to spin off the packaging business once it has reached a sizeable level as it sets to ramp up the new production capacity after completing the new upstream and downstream plants. Lastly, the hospital project with a bed capacity of 130 in Setia Alam will kick-start the construction once it has received all the necessary approvals.

Source: PublicInvest Research - 5 Dec 2024