This article first appeared in The Edge Malaysia Weekly on May 15, 2023 - May 21, 2023

IT is still early days for Putrajaya’s reversal of its export ban on renewable energy (RE) to have a meaningful impact on companies in the sector, but fund managers and analysts believe the move to be a starting point for tapping investor interest in the burgeoning sector.

“This marks an exciting development on the RE front, which I would classify as a special asset class on its own, and in keeping with rising megatrends in the world,” Areca Capital Sdn Bhd CEO Danny Wong tells The Edge.

“We are keeping [our eyes] peeled for RE developments as the returns are expected to be fantastic. Investors should start looking at these counters as the industry will garner growing interest in the next two to three years. [Malaysia is] certainly catching up with global markets,” he says.

The RE sector, particularly solar, was dragged down by the sharp increase in panel prices during the pandemic, which ate into earnings and caused project delays.

This year, the share prices of solar-related outfits like Solarvest Holdings Bhd, Cypark Resources Bhd and Samaiden Group Bhd have rebounded on positive sentiment as demand for solar installations boomed locally due to the rise in electricity tariffs, while talk of RE imports by Singapore intensified.

Pending details on the RE export framework from the government, analysts whom The Edge spoke to have raised the question of the price of investment where the cross-border connection to the grid is concerned, as well as the source of funding for it.

“A back-of-the-envelope calculation indicates a 100% gross profit margin for RE exported to Singapore. This is based on Malaysia’s average regulated household electricity tariff of 40 sen/kWh before rebate and wheeling (transmission) charges of US$0.0228/kWh (10 sen/kWh) compared with Singapore’s S$0.297/kWh (99 sen),” former investment banker Ian Yoong estimates.

“Granted that the negotiated wholesale price is less, the estimated gross profit margin is most likely to be about 20% to 30%,” he says.

Naturally, companies are excited about the earnings potential from the exports. When contacted, Solarvest says the lifting of the export ban presents an opportunity for the company to explore new export markets and offer comprehensive RE solutions to clients beyond Malaysia.

“We believe that the move will enable Solarvest to leverage its expertise and capabilities in the region and expand its international customer base,” says executive director and group CEO Davis Chong.

Similarly, Pekat Group Bhd, which is predominantly involved in engineering, procurement, construction and commissioning (EPCC) and asset ownership via net energy metering programmes, expressed a desire to tap opportunities in overseas RE markets.

“We have long been planning together with our strategic partners on how we can further enhance our product offering and cross-border export of energy is one of them. This could potentially lead to increased production capacity and economies of scale, allowing [us] to compete more effectively in the global market,” CEO Tai Yee Chee tells The Edge.

“We are waiting for the ministry to provide the exact mechanism. However, we have a rough idea of what is required to make this happen. For the export to be successful, it will most likely go through our national grid. This will also largely be dependent on the fee structure charged by local authorities and the demand load by foreign countries. The tariff rate charged [should be] competitive,” he explains, adding that the group has begun discussions with its foreign counterparts to gauge what sort of requirements will be needed.

Another player without local solar capacity but with existing power generation and presence in the Singapore power industry is YTL Power International Bhd, which is importing 100mw of conventional power from Tenaga Nasional Bhd in Johor under a two-year pilot.

When contacted, its managing director Datuk Yeoh Seok Hong says, “We have presence in Singapore, so of course we will [facilitate the] import because Singaporean consumers want green energy. Also, our Malaysian operation will continue to invest in green energy, like in the case of our Kulai data centre, and other opportunities.”

He is referring to the company’s RM15 billion 500mw solar-powered data centre project in Johor, the first phase of which will be commissioned in 2024. The project is in close proximity to “1,500 acres of land that will be used to plant solar farms”, according to its website.

Yoong believes that with its financial and technical capabilities to export RE to Singapore, YTL Power is “fundamentally attractive at an FY2023 price-earnings ratio (PER) of 11 times, with a dividend yield of 5% and price-to-cash flow of eight times”.

He suggests that as more solar energy projects come in, the go-to contractor for the projects would be worth watching out for. “It would be wise to invest in sellers of ‘picks and shovels’ in a gold rush,” he says, pointing to companies like Samaiden, which is involved in the EPCC of Large Scale Solar (LSS) projects. Solarvest is another major EPCC player and it owns LSS assets as well.

Utility giant Tenaga is an obvious beneficiary as “additional investments in grid infrastructure to accommodate the regional RE trade will be positive for its regulated earnings”, MIDF Research says in a May 10 report.

“We believe the potential increase in demand for RE exports will drive more requirements for RE capacity and do not rule out other existing RE owners and developers such as Ranhill Utilities Bhd, Jentayu Sustainables Bhd and Cypark to tap this potential,” the research house adds.

Consequently, another player that stands to benefit from Tenaga’s power infrastructure investments is underground utilities and substation engineering specialist MN Holdings Bhd.

Tenaga’s RM20 billion capital expenditure to modernise its transmission and distribution infrastructure from 2022 to 2024 “presented more contract opportunities to MN Holdings for its underground utilities and substation businesses”, HLIB Research points out in an April 12 note.

That RE features significantly among the pillars of environmental, social and corporate governance (ESG) concerns puts such players at an advantage with investors, say analysts.

RHB Research’s maintaining of its “buy” call on Samaiden with a target price (TP) of RM1.06, for instance, is inclusive of a 4% ESG premium, given that the company’s ESG score is above the national mean, based on the bank-backed research house’s methodology.

“Further upside to our forecasts could stem from potential solar contract and asset wins from the Corporate Green Power Programme [introduced last November to encourage solar power producers and commercial power consumers to partner up to commission additional solar power generation capacity],” RHB Research analysts Jim Lim Khai Xhiang and Lee Meng Horng write in their report.

Lee, who also has a “buy” call on Solarvest amid improving conditions and potential growth prospects in the sector, says his TP of RM1.34 for the counter incorporates a 6% ESG premium, given that Solarvest’s ESG score is above the national median.

That said, developments in the capital-intensive RE industry have some way to go with the cost and the lengthy payback period, technical solutions for cross-border RE transmission, intergovernmental agreements and commitments between Putrajaya and players being major considerations. As mentioned earlier, players are keeping their eyes peeled for the party that will fund the cross-border connection to the grid.

It is noteworthy that most RE players do not pay high dividends and their average PER is already above that of the general market, TA Investment Management Bhd CEO Choo Swee Kee points out.

“We hope the government will do more and introduce more incentives for RE-related matters. Compared with our regional neighbours, this is a sector where Malaysia is quite advanced and is competitive, and as such we should fully exploit this advantage for the benefit of the country,” he says.

Areca Capital’s Wong concurs, stressing that governmental regulation, policies and players’ readiness must come together. “I believe Bursa [Malaysia] is ready for players that really want to move their RE agenda forward. If the bourse allows for a segment to push the RE [agenda], ready players would welcome it.

“More critically, the government needs to facilitate the right balance of policies to support the development of the RE sector. Among key points is the subsidisation of the power tariff. If electricity is cheap, it will work against efforts to develop alternatives [such as RE],” he says in reference to the government’s allocation of RM10.76 billion to cover electricity subsidies for domestic consumers and non-domestic consumers in the low voltage (LV) category for the first half of the year.

“Governmental regulation, policies and players’ readiness must come together. It is hard to gauge how much time is needed for the RE industry to develop but hopefully, things will fall into place in the next five to seven years. It will require political will to achieve this,” says Wong.

“I believe progressive leaders in the unity government will push for this and set policies for it rather than wait for the industry to be led by players. Players need policies so they can progress. If every party just waits for a catalyst, investors will simply consider Malaysia unready for RE.” 

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