This article first appeared in The Edge Malaysia Weekly on July 24, 2023 - July 30, 2023

THE recent sizeable impairment of RM376.5 million made by Cypark Resources Bhd, which is also the company’s first since its listing in 2010, came as no surprise. This is because the delays in its renewable energy (RE) projects, namely two large scale solar (LSS) farms and a waste-to-energy (WTE) plant, are expected to add to its costs and, in turn, affect its returns.

Cypark recorded a net loss of RM298.48 million for the financial quarter ended April 30, on revenue of RM32.21 million. The loss was mainly due to the impairment and write-downs.

The RE producer cited the Covid-19 pandemic that halted economic activities and disrupted the supply chain as one of the few reasons for the slow progress. Changes in the project design also added to the delay.

Cypark described the impairment as a one-off expense after its auditors, Nexia SSY PLT, conducted a review of the company’s assets. The write-downs included provisions for liquidated ascertained damages due to delays in existing projects.

Still, there are concerns over Cypark’s asset value. Of its total assets of RM2.79 billion, 35% comprises intangible assets of RM968.42 million and contract assets of RM753.65 million, raising questions about the likelihood of more impairments in the future.

Speaking to The Edge in a virtual interview, Datuk Ami Moris, the newly minted chair of Cypark and a former investment banker, stresses that the impairment made is sufficient, at least for the time being.

“We feel very comfortable with our current position, but if there is a need to do so we will naturally do it in a timely manner. At this point in time, we don’t foresee any further impairments along that nature, particularly because that impairment was really related to the delay of the WTE project,” she says.

Ami reiterates that the attention should be on the fact that the WTE project has commenced operations in Ladang Tanah Merah, Negeri Sembilan. And that the two solar power projects will be completed by the end of the year.

Furthermore, she highlights the slew of changes in Cypark’s management, including the board of directors, top management and auditor. “We hope it will be different this time around [for Cypark].”

The company’s current focus is to complete its LSS2 floating solar project in Danau Tok Uban, Kelantan, and LSS3 solar project in Merchang, Terengganu, by the end of this year, says Ami.

The completion date for LSS2 had been postponed by nine months to September 2022 from end-2021, and LSS3 to end-2022 from March 2022.

Ami points out that the completion of its solar farm projects will be a game changer for the company as they would boost the RE assets under Cypark’s portfolio to 400mw, making it one of the largest RE asset owners in the country.

“This time next year, when we deliver both the LSS projects, we will be a very different entity. There’s nothing like recurring revenue streams, right? Being actualised. And for both the LSS2 and LSS3, they are 21-year concession assets,” she says.

For the LSS2 floating solar project, Ami reckons that it will be the largest such facility in the world outside China, with a combined capacity of 60MWac/98MWdc.

In addition, the LSS3 solar project in Merchang is estimated to have a capacity of 100MWac/172MWdc once completed.

While acknowledging that there are barely five months left before the year ends, Ami is confident that the two solar projects will be delivered this time round. “About 80% of the work is done,” she adds.

When asked whether the returns of the two solar projects remain intact given the additional costs due to the delay and redesign, Ami replies, “We would not be ploughing all our resources into completing these projects if the returns were not intact.”

Cypark has utilised RM50 million, out of the RM67.1 million raised from a recent private placement exercise, for the development of LSS2, while RM16.8 million was allocated for working capital for the WTE project.

Over the years, the company has yet to see significant contributions to its core earnings, although it has been able to win jobs.

The two solar projects are a lifeline for Cypark. Should it pan out as per the company’s plan, there would be steady annual cash flow from the power purchase agreements, just like for any independent power producer owning a cash cow.

Nonetheless, some quarters point out that Cypark’s large borrowings might be a drain on its cash flow. For the 18-month financial period ended April 30, the company incurred interest expenses of RM61.86 million. This amount would be RM41.24 million if annualised.

As at April 30, Cypark’s total borrowings stood at RM1.44 billion with a cash balance of RM152.23 million. In addition, it had contingent liabilities of RM1.429 billion, the bulk of which was unsecured corporate guarantees given to banks for credit facilities granted to its subsidiaries amounting to RM1.328 billion.

When asked if the company would be required to restructure its debt and potentially have another round of fundraising as Cypark is in a capital-intensive business with a long gestation period, Ami does not rule out either possibility.

“RE is a new industry that requires high capex (capital expenditure), a long execution cycle and multiple stakeholders, so you have to be agile. If the opportunity arises where we need to restructure our existing debt portfolio, we will do so,” says Ami, reiterating that the focal point should be on the long-term prospects of the company.

Cypark’s 20mw WTE plant at Ladang Tanah Merah, Port Dickson, received the nod to start its operations on Dec 14 last year.

To recap, the company signed a 25-year concession agreement (CA) with the government commencing Nov 9, 2015, to build, operate and manage the WTE plant. The plant was initially targeted to start commissioning in the second quarter of 2019, but faced hiccups such as technical issues with road access and location.

However, the WTE plant has encountered teething issues, with the tipping fees received by the company being too low, according to Ami.

Indeed, this is reflected in the rather low quarterly revenue of RM9.2 million for the period between February and April. It incurred a loss before tax of RM77 million due to RM39 million in impairment losses recognised. Cypark noted in its quarterly results announcement that revenue from the sale of energy was lower than estimated.

“Revenue of below RM10 million is not the figure that we are expecting 12 years down the line,” Ami says, when asked about the earnings trajectory of the WTE project.

She adds that Cypark is currently in “active discussion” with the state government on its tipping fees, as the terms were agreed on back in 2015. She admits that there are many moving parts.

Declining to reveal the rate that Cypark intends to seek, Ami says there will be “growth and a healthy increase” while noting that the WTE project is crucial to the local authorities.

“But I think, for governments, whether it’s the federal government [or] state governments, they understand the imperative that if you don’t have these WTE [facilities] and that investment has been made, what is going to happen down the road when waste becomes a real issue,” Ami stresses.

It is understood that Cypark’s landfill tipping fee is RM30 per tonne per day — lower than the fee at many other landfills — as the government has taken into account the revenue the company will earn from selling the electricity generated from waste.

Cypark’s WTE plant has a daily capacity of 100 tonnes, the largest in Malaysia.

“We are looking at waste management for the next three to 10 years on the environmental impact and bigger sustainability agenda. Yes, the project’s IRR (internal rate of return) may not be compelling compared to other RE projects,” Ami comments when asked about the commercial viability of the WTE project.

It is worth noting that last Thursday, Natural Resources, Environment and Climate Change (NRECC) Minister Nik Nazmi Nik Ahmad had commented that a WTE policy could be the most viable solution to the country’s landfill sustainability and waste management concerns.

“Landfills are no longer sustainable, even the legal landfills are not sustainable and there are also a lot of illegal ones,” he said.

However, he conceded that the primary challenge to adopting WTE on a larger scale was the difference in the tipping fee compared to a traditional landfill, which he said is still “very cheap” compared to WTE.

“I think we have to look into this to make sure that the economics work, so more WTE plants can come into place in the country,” he added.

However, Nik Nazmi said WTE is not a primary source for RE in the country. “It is more for waste management, and the energy generated is the bonus,” he explained.

Bluntly put, the story of Cypark tapping the exponential growth of RE isn’t that fresh.

The growth narrative has been told to the investing fraternity for a decade, if not longer. By the same token, the company may say that it has the first-mover advantage, as it had entered the industry much earlier than many others. However, it has yet to demonstrate to its shareholders the great potential of RE through earnings and returns.

Now that Cypark has new board members, senior management and auditor as well as a new major shareholder, it may raise hope that the company could be embarking on a new journey.

Jakel Capital Sdn Bhd, the family office of Jakel Group, early this year through a private placement exercise bought a 27.33% stake in Cypark for RM67.1 million, or 38 sen per share.

The recent 74% climb in Cypark’s share price from the beginning of this year, in line with its RE peers on Bursa Malaysia, could be a reflection of renewed interest in the company.

“I am very emphatic about execution, making sure to have all our ducks in a row. Whether it is from the financial side or project asset management side, we need to ensure that we can deliver the commitments,” says Ami.

She adds that the potential of RE is massive with an estimated investment of more than RM600 billion in the pipeline for Malaysia, in order to reach the country’s goal of net zero emissions by 2050.

“[People are] oftentimes very sceptical of Malaysian companies. But to me, the credibility and expertise that we have brought and will make available to the marketplace [speak for themselves].

“Being a pioneer in this industry, which is still a very new industry, has its drawbacks, but every lesson that we’ve learnt, [from] adapting from ground mounted to hybrid solar and floating, is a lesson in building competitive advantage,” says Ami. 

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