| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.35 (-5.3%) |
| Last Traded | RM0.37 |
| Recommendation | SELL |
A recent investment bank report highlights a significant development for a key player in the renewable energy sector, focusing on a proposed acquisition that aims to bolster its generation asset portfolio despite potential balance sheet challenges. The report outlines the strategic rationale behind the move but maintains a cautious stance on the company’s valuation.
Acquisition Details and Strategic Rationale
The company, a prominent engineering, procurement, construction, and commissioning (EPCC) contractor for solar power plants, has proposed to acquire a 50MWac LSS4 solar plant. The transaction, valued at RM70 million cash, involves a plant previously owned by a subsidiary of a company that became an affected listed issuer under Practice Note 17 (PN17), leading to the halt of construction works and the plant being placed under receivership.
Currently 79% completed, the solar plant requires an estimated additional funding of between RM50 million and RM120 million to finalize construction. As the original EPCC contractor for the project, the acquiring company possesses intimate knowledge of the plant’s specific design and technical construction, which is expected to mitigate execution risks for the remaining phase. Taking over ownership is projected to revive and complete the project, targeting a commercial operation date (COD) by 4QCY26.
The acquisition aligns with the company’s strategy to expand its renewable energy generation assets, thereby growing its recurring income base. Preliminary estimates suggest an internal rate of return (PIRR) ranging between 6% and 8%, considered a decent rate of return for an LSS plant.
Financial Implications and Outlook
On the financial front, the LSS4 plant is estimated to enhance the group’s annual earnings by approximately 22%, assuming an eventual 80:20 debt-to-equity financing structure. However, the report cautions that the acquisition will likely stretch the company’s balance sheet, necessitating additional borrowings to fund both the purchase consideration and the remaining construction costs. As of the end of FY25, the company’s gross cash stood at RM55 million, with a net gearing of 70%, relative to the RM70 million purchase consideration and the additional funds required.
The proposed acquisition is contingent upon shareholder approval and is anticipated to be completed by 2QCY26. Despite the potential for earnings growth, the investment bank maintains its recommendation, citing current stretched valuations.
Analyst Recommendation
Pending the completion of the acquisition, TA SECURITIES has maintained its Target Price (TP) at RM0.35, based on 18x CY26F PER, which is in line with the historical mean. The firm reiterates its “SELL” recommendation, noting the current stretched valuations of 19.6x CY26F PER.
