CYPARK 5184 CYPARK RESOURCES BERHAD: Concerns arose from misunderstanding of business model
Worries over Cypark Resources Bhd in relation to its more than RM1 billion in debt, cash flow deficit and project delay have driven down its share price. In the following written reply to queries from The Edge, however, Cypark group CEO and executive director Datuk Daud Ahmad stresses that all is fine and it has complied with accounting standards.
The Edge: The share price of Cypark has tanked recently. There have been concerns over the company’s cash flow and high gearing. Can you shed light on the matter?
Daud: We believe the concern raised came from a misunderstanding of Cypark’s business model. The negative cash flow is expected from the business model of concessionaire-based projects like solar farms and WTE (waste-to-energy), which require intensive capital expenditure (capex) upfront.
During the first few years of the construction stage, revenue will not be generated as yet and at the same time, we need funds to construct the concessionaire assets, resulting in a negative operating cash flow [which is expected]. Once the assets are completed, they will start to generate stable and reliable income for the next 21 years and the cash flow will turn positive consistently for many years to come.
In the financing structure of our concession projects, we have raised specific financing to fund the projects during the construction phase. However, according to MFRS 107 Statement of Cash Flows, drawdowns from project loans/borrowings need to be classified in cash flows from financing activities and are not allowed to [be] set off against cash flows from operating activities despite the fact that the financing is structured and designed solely to finance the construction of the particular revenue-generating assets.
In view of the accounting requirement as mentioned above, we need to view the cash flows from operating activities together with the cash flows from financing activities so the status of negative cash flow can be better understood, that it is not to be viewed as the company’s cash flow concern. (For a more detailed explanation, please refer to the explanation in our Cash Flow Statement of 1Q2022.)
The future cash flow from RE (renewable energy) assets like solar farms is very stable as proven by other solar farms completed and operated by Cypark since 2012. The stable cash flow track record of the completed solar farms over many years has given a lot of comfort to lenders as certainty and reliability of cash flow is high.
The decision by Cypark to invest in solar assets and other RE assets has been rationalised on the reliability and certainty of future revenue and strong cash flow streams.
Due to the lower operating costs and tax breaks enjoyed by our RE project, the future operating cash flow is high and stable (due to no feedstock cost, no consumables fluctuation risk, etc) and net operating cash flow is also high (in the range of 70%-90% of annual revenue). Cypark expects that in 2023, when almost all ongoing projects are completed, the tide will turn and the negative operating cash flow will be reversed, in line with our business plan.
Out of the RM1.4 billion, approximately 85% are long-term loans and sukuk, which are for project financing lines to construct our RE concession/contract assets. In Cypark’s business model, just like all energy-industry power plants, either fossil fuel or renewable, the projects require ‘big’ upfront investment whereby about 80% is financed and 20% is equity financed.
The loans will be pared down by the stable recurring cash flow streams to be received from a triple A-rated offtaker (Tenaga Nasional Bhd) for the sales of RE and from the government of Malaysia for the tipping fees.
The project inflows are more than sufficient to repay the debts according to the repayment schedule. It is therefore important, in evaluating the gearing level of our RE project, that the strong capability to generate (future) cash flow to pay the loan should also be looked into so that a positive conclusion can be derived.
It is fair to mention that the business models adopted by Cypark have received support from the shareholders as the financing models have been explained numerous times previously during the institutional investors’ briefing, AGM and placement exercises.
It is important to note that the public placements issued by Cypark in the past, including the one completed last December, had clearly communicated that the funds raised were for the purpose of equity financing (part, balance by loan) of our RE project and received strong support and approvals. Hence, we are puzzled that the issue of the financing model is being used as a reason to drive our share price now as if it were a new event.
Is it true that there have been delays in Cypark’s power projects, including the SMART WTE plant in Ladang Tanah Merah and the floating solar plant in Tasik Danau Tok Uban (DTU)? What are the initial deadlines? Why the delay? What are the latest completion deadlines for the two projects? Apart from the SMART WTE and DTU plants, which projects are also delayed and why?
It was rather unfortunate that Cypark had to go through its construction stage during the Covid-19 period. The Covid-19 pandemic, which is recognised as a force majeure, disrupted not only site work, but also the whole supply and services ecosystem.
The prolonged and multiple Movement Control Orders imposed have resulted in work stoppages, zero or lower productivity, delays in supply chain, manpower disruptions, etc. With the removal of many controls recently, we have been able to be back to almost full productivity and managed to perform some catch-up on the delays.
For the DTU project, it has reached the final stage of construction, whereby the 200-acre floating solar system installation and 10km-long interconnection work are already completed.
The delay is in the grid interconnection facilities (IF) part. The construction is still progressing but facing some delays due to a slower approval process by TNB, which involves additional requirements.
We target that the new COD (commercial operations date) will be by end-September 2022.
Please note that the delay does not affect the future operating cash flow of the projects as the concession periods and tariff are not affected. The impact of the delay is manageable as the ability to comply with the sukuk commitment is within control and RAM has reaffirmed the rating of the sukuk.
For the WTE project in Ladang Tanah Merah, the construction has been completed for quite some time and is currently going through the final stage — the testing & commissioning (T&C) stage.
There were some unfortunate delays in starting the T&C due to the late arrival of the foreign experts who were to carry out the T&C works, caused by prolonged travel restrictions and stringent SOPs (standard operating procedures) to bring the required foreign experts into Malaysia.
Fortunately, since April 1, 2022, the experts have been able to travel and most of them are already here now. The T&C activity is well in progress now. We target the new COD by end-September 2022.
Despite the delays in Cypark’s projects, the company has been fairly profitable over the years. How did Cypark generate earnings? Which projects in particular are the largest earnings contributors?
As reported in our AFS (audited financial statements), our main earning contributor is the Renewable Energy Division. For the brownfield completed projects, as said, they are generating stable revenue.
For some of the ongoing construction of RE projects, due to the unique arrangement as turnkey contractor-cum-financier, there is contract revenue and interest revenue recognised during the construction phase, which is pursuant to Accounting Standard MFRS 15. Please note that for the earlier solar projects completed and currently in operation, the plants enjoy much higher tariff and hence strong cash flow.
As for WTE, although it is still not in operation (expected in September 2022), the cash flow comes from the tipping fees paid monthly by the government since 2016.
Did Cypark recognise a construction profit of RM188.4 million from the WTE project? How? Did the board of directors allow that?
The recognition and reporting of the WTE project cost and revenue require compliance with the prevailing accounting standards.
Since the WTE project is a build-operate-transfer (BOT) project and falls within the definition of IC Interpretation 12 (Service Concession Arrangements), we have to report it accordingly.
The adoption of IC12 is not unique to Cypark’s project as other parties’ similar projects are required to comply with (it too).
Many, due to a lack of understanding of IC12 requirements, have also questioned the validity of our intangible assets. The intangible assets reported are, in fact, for the recognition of our physical landed assets, the SMART WTE Plant, which by concession contract belongs to us legally. However, the accounting standard requires the physical assets funded and constructed by us to be treated as intangible assets. The common public impression of intangible assets normally associates intangible assets with goodwill, non-physical, arbitrary valuation, etc, which does not reflect our assets, which are physical, legally owned and established cost.
CYPARK 5184 CYPARK RESOURCES BERHAD: Concerns arose from misunderstanding of business model