This article first appeared in The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

SOLARVEST Holdings Bhd, which has relied solely on organic growth since its inception in 2012, is on the hunt for mergers and acquisitions (M&A) in a bid to enhance its earnings prospects.

“Solarvest has been focusing on growing its solar capabilities in the past. However, to truly be a regenerative clean energy expert, we will need to expand beyond solar.

“Inorganic growth is the fastest way for us to leap our company forward in terms of technical capabilities and financial performance in a shorter time frame,” says CEO Davis Chong Chun Shiong, a co-founder of Solarvest.

Nowadays, says Chong, the market requires an expert that provides comprehensive solutions, which may involve different types of renewable energy (RE) or infrastructure, and Solarvest intends to be that one-stop solutions provider.

Solarvest does not have any specific M&A target as yet, according to Chong. It is looking at acquisition sizes of RM5 million to RM10 million. The choice of funding will depend on several factors and will be determined on a case-by-case basis.

“We are targeting businesses that can contribute to the group on a strategic level. This can be companies in other areas of expertise as compared to Solarvest, but within the RE ecosystem.

“For example, we might consider investing in a battery storage company as it directly complements our solar power business. We are open to the target company being foreign or local,” he says.

Chong notes that profitability is not quite the main criteria when evaluating a prospective acquisition. He reiterates, however, that Solarvest’s M&A targets have to be aligned with the company’s strategic goals and have the potential to add value for the group.

Solarvest is keen on two types of companies — those that are subject matter experts with the technical know-how and a ready team to run the operations, and those with overseas expansion plans that complement its future direction.

“Nothing is definite at the moment, but we hope to have two to three potential acquisitions this year. Any significant development on this front will be duly announced through Bursa Malaysia,” Chong says.

He adds that Solarvest has the financial resources to provide capital and other support to accelerate the business when needed.

While it is searching for M&A targets, it is worth noting that Solarvest has entered into no less than six memoranda of understanding since it was listed in 2019. So far, none have born fruit.

Sitting on net cash of RM58.6 million, the company appears to have a strong balance sheet for acquisitions. The cash pile was partly boosted by the proceeds from its initial public offering (IPO) in 2019.

Interestingly, while the company has yet to utilise its IPO proceeds, it did a sizable private placement of new shares, equivalent to 20% of its issued share capital, plus an Employee Share Option Scheme of 20.49 million shares, equivalent to 15% of its share capital.

Chong was granted an entitlement of five million shares at an exercise price of 66 sen per share, while managing director Lim Chin Siu and executive director Edmund Tan Chyi Boon were given options to buy 2.5 million shares each. Up to 10.49 million share options were given to other eligible employees.

Solarvest has raised some RM73.5 million in fresh funds from the private placement.

Solarvest, a solar turnkey engineering, procurement, construction and commissioning (EPCC) solutions specialist, was co-founded by Chong, now 43, and Lim and Tan, his childhood friends. Their investment vehicle, Atlantic Blue Holdings Sdn Bhd, is the single largest shareholder of Solarvest with a 22.87% stake.

Solarvest’s second largest shareholder is Chin Hin Group Bhd founding executive chairman Datuk Seri Chiau Beng Teik, who owns 19.34% equity interest. Solarvest’s top 30 shareholders as at June 30 last year included Hextar Group CEO Datuk Eddie Ong Choo Meng, two Affin Hwang funds and Kenanga Shariah Growth Opportunities Fund.

Notably, Chin Hin, which was a pre-IPO investor in Solarvest, last year offloaded its entire 19.34% stake in the company to its controlling shareholder Chiau’s investment vehicle, Divine Inventions Sdn Bhd, for RM103.28 million cash or 80 sen per share in a related-party transaction.

With the recovery in construction activities along with the country’s transition to the endemic stage of Covid-19, Solarvest is expecting a ramp up in its EPCC projects.

“As material prices stabilise [and] with a four-year extension for power purchase agreements for all three of our assets awarded under the LSS4 [Large Scale Solar 4], the internal rate of return for our EPCC projects is expected to improve,” says Chong.

Solarvest has been awarded the 25mw and 12mw solar farms in Manjung, Perak, as well as the 13mw solar farm in Kuala Selangor.

The 25mw project in Manjung and 13mw project are still under construction. The two projects are targeted for completion next month. As for its 12mw project in Manjung, engineering design work is ongoing and it is slated for completion by October.

Meanwhile, Chong highlights that Solarvest hopes to boost its unbilled order book further by capitalising on the recent release of a 600mw quota for solar photovoltaic assets under the Corporate Green Power Programme.

“As we are targeting to complete two of the LSS4 plants by March, revenue contribution from asset ownership projects is also expected to subsequently increase. With that, we believe we would be on track to meet our target for asset ownership projects contributing 30% of our profit by 2024,” he says.

In the first half ended Sept 30, 2022 (1HFY2023), Solarvest’s net profit jumped to RM9.29 million, up from RM1.18 million a year ago. The improved performance was attributed to higher contributions from LSS projects, while also driven by contributions from construction activities.

To annualise the earnings number, Solarvest’s net profit would have been RM18.6 million, or 2.78 sen per share. Based on last Thursday’s closing of RM1.09 and its annual estimated earnings per share of 2.78 sen, the stock is trading at a price-earnings ratio (PER) of 39 times.

Should the company’s net profit make a 50% year-on-year jump on annualised earnings in the financial year ending June 30, 2024 (FY2024) to RM27.9 million, or 4.17 sen per share, Solarvest is valued at a PER of 26 times.

Chong believes the PER is an encouraging sign that reflects strong market confidence in Solarvest’s prospects.

“Solarvest’s growth prospects remain intact as we maintain healthy financial fundamentals. We have a solid order book of RM662 million as at Dec 31, 2022, with earnings visibility up to FY2024. The group also owns 50mw worth of solar assets that will increase our recurring revenue stream,” he highlights.

Moreover, Solarvest is targeting one gigawatt-peak of solar capacity installation by 2025.

Solarvest’s share price staged a rebound about three months ago, in late November last year. The stock bounced back from a low of 71 sen to a high of RM1.16 on Feb 8. The success of its solar power ventures is certainly needed to sustain its high share price going forward.

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