Cypark (5184) is a industrial stock listed in Malaysia Bursa main market with dividend yield of around 4-5% based on past records. Let’s take a detailed look into this leading company in Malaysia in the field of environmental engineering and renewable energy.
Table of Contents
Background of Cypark
Cypark (5184) is an industrial sector company focusing on environmental engineering and renewable energy. Cypark is leading company in this sector in Malaysia. With its low PE (<5 at the time of writing) and expected dividend yield of 4-5%, it looks like Cypark could be undervalued by market. So let’s dig into details of this company and have a look.
Business of Cypark
Cypark provides a variety of product and business model. Based on its financial reports, the business are categorized into four segments as follow:
- Environmental engineering
- Provide solution to customers associated with landfill and dump sites
- Renewable energy & green technology
- Produce electricity from renewable energy resources, mainly solar, biogas, biomass and municipal waste
- Manufacture and export biomass fuel from empty fruit bunches obtained from oil palm
- Landscaping and infrastructure
- Small scale construction work, such as upgrading work for highway etc.
- Maintenance works
- Minimal contribution to revenue and profit, so this will not be elaborated here.
Majority of the revenue (>85%) and profit of Cypark comes from environmental engineering, renewable energy & green technology segments.
Searching online, most of the news about Cypark are probably related to LSS (Large Scale Solar) projects. Indeed, this is probably the brightest prospect of Cypark.
Business model of Cypark
1. Concession projects – Large scale solar (LSS) plants awarded by SEDA Malaysia (Sustainable Energy Development Authority). The contract will be based on build, own and operate concession. Under the concession agreement, once the plant is operating, solar energy generated will be sold to National Utility Company Tenaga under power purchase agreement (PPA) that will be valid for 21 years with a fixed energy price throughout.
All associated cost from Cypark, including engineering, procurement, construction, land, financing, operation & maintenance, are included in the energy price to be paid.
Prior to start of commercial operation to sell energy to Tenaga, there are few critical milestones to be met.
So building a LSS plant requires high capital investment & time upfront. Once the plant is operational commercially, it will generate stable income stream over a long period of time.
More information can be found on LSS can be found from SEDA website here.
2. Concession project – Waste-to-energy (WTE) plant awarded by government. This plant is first of its kind in Malaysia, and the WTE plant that Cypark is building is located at Ladang Tanah Merah, Sembilan.
Once operational, government will deliver municipal solid waste from designated scheme areas in Seremban to this plant for treatment and disposal. The plant will receive and segregate the waste. Some waste will be disposed by sanitary landfill, while some waste will be used to generate electricity.
The contract is based on 25 years of concession period. During this period, the plant will generate two income streams
- Tipping fee paid by government based on tonnage of waste received
- Sales of energy generated to Tenaga
Similar to LSS, this is also type of project that requires intensive capital and time investment upfront. More information about WTE plant can be found from Cypark website here.
3. One-off projects – These projects are smaller in scale. The role of Cypark is contractor, revenue is generated based on work performed in accordance with the contracts. This kind of projects include installation of small-scale solar plants for buildings and landfill remediation projects.
4. Manufacturing and export of biomass solid fuel – The biomass solid fuel is generated from oil palm empty fruit bunches, which are biomass from palm oil mills.
Overview of renewable energy market
Policies and incentives from government
Globally, and locally in Malaysia, renewable energy market continues to grow. Normally government policies play an important role on growth of renewable energy market.
In Malaysia, incentives and policies by Government to promote renewable energy includes
- Green investment tax allowance (GITA)
- Green investment tax exemption (GITE)
- Green technology financing scheme (GTFS), i.e. government will subsidize a portion of interest expense related to green investment
- Net energy metering (NEM), i.e. solar energy from installed system will be consumed first. Excess energy will be exported back to Tenaga on “one-on-one” offset basis instead of displaced cost only
- Malaysia energy supply industry 2.0 (MESI 2.0). This is a 10 years master plan to reform the power industry. Under the plan generation and distribution of power will be liberalized, i.e. renewable energy generators do not necessarily need to sell electricity to Tenaga. Note that this is a master plan but liberation has not been materialized yet.
Renewable energy target of Malaysia government
In 2018, Malaysia announced that target of the country is to achieve 20% renewable energy in its generation mix by 2025. This implied RM33 billion of investment in renewable energy sector based on news in year 2019 here. Among this, solar energy will take the biggest share.
Declining cost of solar energy
Globally of solar photovoltaic panel has been going downtrend, making solar energy much more economically feasible nowadays.
Competitiveness in solar energy market
As more local and international players enter the market, it is getting more and more competitive. This can be seen from LSS 3 tender, bidding price ranged between 17.77 sen and 23.18 sen, cheaper than indicated gas-based power price of 23.22 sen. The lowest bid of 17.77sen is almost 25% cheaper than indicative price. The bidding price is based on resource here.
It is unclear who is the bidder giving the lowest price, which some players think that it is not a sustainable price. Competition could be good and bad. If there is price war to win projects, eventually it will hurt the margin of the industry as a whole.
Prospect of Cypark
Over the past few years, Cypark is switching their focus from short to medium term project to long term concession projects (i.e. large scale solar LSS projects and waste to energy WTE projects).
Large scale solar LSS
So far Malaysia government has awarded LSS1/2/3. Cypark is the only company that have won some in all three LSS tenders.
LSS4 tender has started and should finalize at end of this year. Its power generation size is double of previous LSS3, and total contract value worth RM 4 billion according to resource here.
In financial reports, company is optimistic of success rate of 20% in LSS4.
Waste to energy WTE
WTE plant that Cypark is building is located at Ladang Tanah Merah, Sembilan is first of its kind in Malaysia. This put Cypark in a good position to win future WTE projects.
According to resource here, government is planning for 6 more WTE plants by 2021. Tendering of the 1st one should start in September 2020.
Oversea prospect
As of now, Cypark has been working on projects in Malaysia only. In 2019, Cypark has started to actively participate in tenders in ASEAN countries, such as Singapore, Thailand and Vietnam.
Looking into financial of Cypark
There are a lot of good prospects that Cypark is going after. But bear in mind that these projects are very capital intensive, especially for concession type of projects which cash flow will only come in at much later stage. So let’s look into financial of Cypark.
Balance sheet
Looking at the latest quarterly report ended 30th Apr 2020, a larger portion of assets are intangible assets (40%) and contract assets (30%). It is very important to understand these two items and they play a critical role in the overall financial health of Cypark.
Intangible assets
Intangible assets are mainly related to waste-to-energy concession project, as disclosed in the audit report in FY 2019 annual report. Once the plant is up and running, the tangible asset will be amortized as cost.
Think about that, how to calculate the value of a concession contract from government? There are many factors in play such as capital cost at the beginning, operating cost, interest expense on the borrowing to fund the project, revenue generation in the future etc. Note that there is no contractual guarantee on investment return on concession contract. Valuation of intangible assets involves a lot of assumptions and judgement from management.
For Cypark, because intangible assets is such a huge portion of its total asset, so need to closely monitor after the WTE plant is up and running. If unfortunately, operating profit in the future turns out to be lower than expectation, Cypark will need to incur impairment loss accordingly.
This is also one of the key audit issues highlighted by auditor in the annual report, I would always follow up on “Independent Auditor’s Report” section of annual report to get an insight.
Contract assets
Contract assets shares similarity with receivable, except that payment is not only depends on passage of time but also other performance obligation. Note that the term “contract assets” is only used starting from annual report in FY2019 following adoption of accounting standard MFRS 15. In previous financial reports, all contract assets are categorized as part of receivable.
(Read more about MFRS here).
Although it is not specifically disclosed in the financial reports, I believe that contract assets are related to solar energy business. Unlike normal receivable which can be billed to customers after work completion, contract assets require additional performance obligation from company in order to bill. In case of solar business, this additional obligation can be successful testing and commissioning.
Additional note, there is an amendment to MFRS 123 effective from 1st July 2020. It says, “receivables and contract assets for unsold units under construction which revenue is recognized over time are not qualifying assets”. Management did not disclose if this has any impact to account of Cypark yet.
Impairment
There is no provision for impairment for trade receivable and contract assets in Cypark’s financial reports. Based on annual report in financial year 2019, more than 60% of trade receivables are past due for more than 90 days. Management mentioned that they are of opinion that there is no allowance of doubtful account required.
The credit risk of Cypark is very concentrated. Based on annual report FY2019, 82% of trade receivables are from 5 customers, and 82% of contract assets come from 3 customers.
There are two things to consider here.
First, if any of the customers defaults in the future, the impairment loss bill will be huge to Cypark.
Second, even the customers are eventually paying, delay in payment from customer is a cost to Cypark. Imagine that a company does not get payment on time from customers, the company has to borrow capital from somewhere else to operate the company. Borrowing comes with interest expense = additional cost.
Gearing ratio
Cypark’s policy is to keep gearing ratio below 50%. From the latest quarterly report ended 30th Apr 2020, Cypark is now having gearing ratio of 49%.This means that to fund future project, it is very likely that Cypark will need to increase it equity base, such as issuing new shares and private placement.
Liquidity and cash flow
Cypark has issued Sukuk (Islamic bond) worth RM550 million in year 2019. While this has increased its debt, it has improved liquidity significantly.
From the latest financial report at the time of writing, Cypark has current asset of RM1.1 billion and current liability of RM380 million. It has been mentioned in the above that a large portion of asset is contract asset. For current asset, 60% of it is contract asset.
Current asset is normally defined as assets than can be quickly converted into cash in 1 year time. But is this the case for contract asset of Cypark listed as current asset? Does not seem so. Take annual report of year 2019 as example, Cypark has RM540 million of contract asset as current asset but billed amount from the past year is only RM6 million. Judging from annual reports from past few years, I would exclude contract asset when considering liquidity management of Cypark.
This can also been seen from cash flow statement. Cypark has been recording negative net operating cash flow, and the biggest culprit is because of big chunk of unbilled contract assets. Not to mention that Cypark also has a large portion (>60%) of trade receivables that are overdue for more than 90 days.
Compare with RM380 millions of current liability, current asset excluding contract asset is RM435million, current asset excluding both contract asset and trade receivable is RM 391 million. So this is what I meant by RM500 millions of Sukuk issuance improves Cypark’s liquidity a lot.
Share dilution
Cypark has corporate exercise every year to increase its equity base, including issuance of ESOS, dividend reinvestment plan and private placement. It is important to not just look at increase of revenue and profit, but also keeping track of earning per share (EPS) growth.
Financial result highlights (Quarterly Report of Q2 financial year 2020)
- The latest financial report is for 2nd quarter of financial year 2020 ending 30 Apr 2020. So this financial result has included 1.5 month impact due to move control order (MCO) by Malaysia government to contain COVID-19.
- Because of MCO, the revenue for cumulative 6 months has reduced by -12.2%. However net profit increased by 2.2% and earning per share (EPS) remains flat.
- Why profit is still going up despite fall in revenue? 1. Improving margin 2. Boost from adoption of MFRS 15 (some revenues can be recorded earlier) 3. Better saving in financial cost (Sukuk issued by Cypark in 2019 has lower interest rate compared to existing loans) 4. Change in estimate of useful life of solar plants
- Is proft turning into cash? No. Cypark has recorded RM42 million of profit before tax, but net operating cash flow is negative RM91 million. Biggest culprit is because of cash tied up with contract assets that has not been billed, as explained earlier in this article.
- Cypark typically declared dividend around May of the year. However no dividend has been declared, and I believe this has something to do with and COVID-19. Cypark has a policy to declare at least 25% of net profit as dividend. Company did not address whether Cypark is conserving cash to prepare for bad times or just postponing dividend to next quarter.
End
In my opinion, investors that decided to invest in this company definitely is because of its bright business prospect. In contrast, investors decided to step away is because of its financial health issues.
Due to its high gearing ratio, Cypark will likely need to increase equity base (i.e issue more shares) to fund new projects. So whether increasing revenue & profit from new projects can translate into increasing earning per share (EPS) is something that needs monitoring.
On the other hand, it is expected that commissioning of waste-to-energy plant and commercial operation of LSS1 will be completed in 2020 (subject to no more MCO due to COVID-19!). That will be the time to see how much & how fast intangible assets and contract assets can be converted into real cash. This is a very crucial point to invest in this company, and I would obtain a better visibility on this before making any decision.
In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.
Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.
Well done !
I give 5 stars(full marks) to your ready great analysis !