Malakoff announced that its wholly-owned subsidiary, Tuah Utama SB (TUSB) and Malakoff Technical Solutions SB (MTSSB), had entered into Heads of Agreements (HOA) with Rising Promenade SB (RPSB) to participate in the development of three hydroelectric renewable energy plants with a total of 84MW located in Kuala Krai, Kelantan, with 70% interest. This will increase the Group’s effective renewable energy (RE) portfolio from 39MW to 98MW (after the 70% interest). The expected project cost is about RM1.23bn with 80% of the cost funded by Sukuk. Based on our checks, the project is expected to command a high single-digit internal rate of return (IRR), delivering steady positive cashflows. Since the project is only expected to achieve commercial operations by 4Q 2025, we retain our earnings estimates at this juncture. Our Outperform call is affirmed with an unchanged DCF-based TP of RM1.02.

• Hydroelectric portfolio. RP Hydro (Kelantan) SB (RPHK) was awarded the development and ownership rights of three hydroelectric renewable energy plants, namely the 29MW Kemubu Small Hydropower Plant (SHP), the 25MW Kuala Geris SHP and 30MW Serasa SHP, by the state government of Kelantan. The cumulative installed capacity of 84MW are all located in Kuala Krai, Kelantan.

• The HOA will enable the Group to participate in the project under 3 conditions: i) TUSB to purchase 70% of ordinary shares in RPHK from RPSB, ii) TUSB to subscribe up to 250m preference shares in RPHK (as financing requirement), and iii) MTSSB to purchase 70% ordinary shares in Rising O&M Engineering Services SB (ROMES) from RPSB. This will allow the Group to control the new portfolio as both concession owner and operation and maintenance (O&M) of the assets.

• High single digit IRR. In June 2021, RPHK entered into 3 separate Renewable Energy Power Purchase Agreement (REPPA) for a period of 21 years. Assuming the project commands 7%-9% IRR from the RM1.23bn project cost, we expect to see steady cashflows with ample buffers, ranging from RM110m to RM130m on average per year over the period. The equity return could be enhanced with 80% of the project funded via Sukuk, subject to the rate and the timing of the issuance.

• Long Term RE Target 1,400MW. In addition to the hydroelectric portfolio, the Group has also submitted a proposal for the Corporate Green Power Programme (CGPP) last week. We reckon it could secure at least 30MW quota from the programme. We believe the Group’s long term target is achievable due to growing demand for RE, in line with the Government’s target of 31% RE in the capacity generation mix by 2025.

Source: PublicInvest Research - 22 Mar 2023