Cypark’s future growth prospects will be underpinned by (i) earnings from sale of electricity from its new 20MW biomass and 5MW biogas facilities by early-2018 onwards, (ii) tipping fees from maintaining the sanitary landfill in Ladang Tanah Merah (LTM), and (iii) more construction-related contracts secured in the coming years. We are lowering our earnings for FY17F-19F however, by an average of 13.3%. We include the one-off ESOS expenses in FY17 estimates and increase our amortisation cost on the waste-to-energy (WTE) project. The resultant effect of these changes is a slight lowering of our SOP-based target price to RM2.62 (previously RM2.64), yielding only a potential return of 1% from the current price. With limited upside, we downgrade our call on Cypark to Neutral. Re-rating catalysts could however come from new solar projects and a potential second WTE plant in LTM within the next 3 to 4 years’ time.
Source: PublicInvest Research - 6 Jul 2017
- Expanding RE contributions. To recap, Cypark’s WTE project in Ladang Tanah Merah, Negeri Sembilan (LTM) is expected to be completed by end-CY17. Hence, we are expecting earnings contributions from its renewable energy (RE) segment to improve in CY 2018 onwards, through the sale of electricity from its 20MW biomass and 5MW biogas facilities. This is expected to generate about RM65m additional revenue per year from the biomass plant, translating to profits of about RM15m which we had already previously accounted for. In addition, there are also 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/tonne for every tonne of municipal solid waste (MSW) received. We reckon LTM received about c.500 tonnes of MSW in FY16 due to it being in the early stages. Nevertheless, the 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. In addition, we understand that Cypark is submitting tenders for the second bidding of the Large Scale Solar (LSS) programme under purview of the Energy Commission (EC), which is expected to be commissioned in 2019-2020. As the EC has allocated a higher target aggregate capacity of 360MW of solar development in Peninsular (compared to 200MW in the first competitive bidding last year), we believe Cypark stands a good chance due to its pioneering status and possessing technical expertise as solar developer and operator. Cypark’s RE segment contributed c.16.5% of total revenue in FY16, and is expected to increase to more than 30% by 2018 onwards. Management targets more than RM300m of recurring revenue under the RE segment by year 2020.
- 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 this year-end, Cypark has managed to secure few other contracts to
replenish its segmental orderbook. To recap, it secured a 15-month
landfill closure contract in Pajam at a contract value of RM15.2m 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 RM28.5m in March 2017. Besides, Cypark also recently
secured a project to develop large sale solar (LSS) plant of c.15MW (dc)
with a contract value RM75m. However, we make no adjustments to our
earnings estimate as it forms part of our replenishment assumption of
more than RM100m per annum for the coming years.
- 1HFY17 performance.
Revenue for 1HFY17 increased by 11.9% YoY to RM162.4m, driven by higher
EE-related contributions (+36.9%) which was mainly contributed by
higher construction revenue in WTE. Its landscaping and infrastructure
segment contracted 42.7% YoY to RM18.5m 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 RM22.9m.
Excluding one-off ESOS expenses of RM5.2m incurred in 2QFY17, core net
profit was RM28.2m (+10.5% YoY). The results were below our expectation,
but in-line with consensus full year estimates, accounting for 45.5%
and 50.4% respectively.
- Valuation. We lower our earnings estimates by an average of 13.3% for FY17F-19F to account for one-off ESOS expenses in FY17 and higher amortisation costs from the WTE project. We also adjust our PE multiple for the non-RE which is mostly construction-related to 9x (previously 6x), which is the average multiple for other construction companies (i.e. between 9x-10x). As a result, our new SOP-based target price is lowered slightly to RM2.62 (previously RM2.64), yielding a potential return of only 1% from the current price. With limited upside, we downgrade our call on Cypark to Neutral. Re-rating catalysts could however come from new solar projects and a potential second WTE plant in LTM within the next 3 to 4 years’ time.
|CYPARK (5184) - CYPARK - Expanding RE Segment|
Source: PublicInvest Research - 6 Jul 2017