This article first appeared in The Edge Malaysia Weekly on December 18, 2023 - December 24, 2023

RENEUCO Bhd incurred an impairment loss of RM132.53 million in its fifth financial quarter ended Sept 30, 2023. Indeed, based on its closing price of 21.5 sen last Thursday, the sum represents more than 80% of the company’s market capitalisation of RM159.6 million.

The impairment loss dragged Reneuco, formerly known as KPower Bhd, into a quarterly net loss of RM125 million. It is worth noting that the company has changed its name twice in four years. It was called Kumpulan Powernet Bhd prior to KPower. It is also changing its financial year end to Sept 30 from June 30.

When asked what caused such a sizable impairment, Reneuco tells The Edge it was mostly related to engineering, procurement, construction and commissioning (EPCC) contracts for which the relevant project owner had yet to obtain financial close, or pending disbursement from the financiers.

Reneuco, however, did not divulge the details of the project owner mentioned.

The impairment raises eyebrows because its mini-hydro dam projects in Laos are owned by OHP Capital Sdn Bhd — a company that is related to its major shareholder and CEO.

In addition, Reneuco just completed the acquisition of Adat Sanjung Sdn Bhd, which holds an indirect stake in three hydro-dam projects in Sabah.

According to industry sources, the contracts that are being impaired are related to the company’s existing as well as former shareholders.

A random check of the EPCC contracts that Reneuco had secured in the last three years reveals that OHP Capital is involved in a number of them.

Reneuco’s major shareholder and executive chairman Datuk Mustakim Mat Nun owns a 51% stake in OHP Capital while group CEO Amirul Afif Abdul Aziz owns 30%, a filing with the Companies Commission of Malaysia (CCM) shows.

Reneuco is extending its reach in the energy sector, venturing into mini-hydro dams in Laos and Malaysia.

In June 2020, the company, then known as Kumpulan Powernet, announced that its wholly-owned subsidiary KPower International (L) Ltd had secured a contract from Zhenghong Building Road & Bridge Construction Co Ltd for the supply, construction, commissioning and completion of the civil works in relation to the development of two 3x5mw hydropower energy-generating facilities, namely Nam Taep 1 and Nam Taep 2 at Ban Nam Taep and Ban Nam Nameuang in Houaphan Province, Laos.

The value of the contract was US$40.7 million, which at the time translated into an equivalent of about RM174.5 million, according to the announcement.

The company declared at the time that none of the directors and/or major shareholders of the company and/or persons connected to them had any interest, whether direct and/or indirect, in the award.

Four months later, it revealed the shareholding of Mustakim and Amirul in OHP. On OHP’s website, the group states that Nam Taep 1,2,3, Hydropower Co Ltd, a member of the group, is the project owner of the Nam Taep hydroelectric power plant project, with KPower as its EPCC contractor.

Between Nov 28, 2019 and Oct 14, 2020, Kumpulan Powernet made transactions worth RM48 million with OHP, as stated in a circular to shareholders. The transacted sum was for its provision of construction and project management services for the projects owned by OHP Group under the infrastructure, utility, energy and logistics sectors.

The company anticipated transactions worth an estimated RM250 million in the following year. The actual value transacted between Dec 9, 2020 and Oct 21, 2021 with OHP was much lower at RM14.78 million.

When asked about the progress of the hydropower plants in Laos, Reneuco said it had redeployed resources for the Ban Nam Taep project back home in Malaysia.

“In conjunction with the group’s asset ownership programme where the group had won the rights to develop hydro projects in Kelantan, its current development of the LSS4 project and property development in Kuala Nerus, Terengganu as well as other projects in Malaysia, it has chosen to concentrate its resources on the local projects,” says Reneuco in response to The Edge’s questions.

Interestingly, Reneuco says it is not involved in the Ban Nam Nameuang hydropower project, although the letter of award states that the contract is for hydropower projects located in both Ban Nam Taep and Ban Nam Nameuang.

The latest status of the Ban Nam Nameuang project is unclear.

KPower was a sister company of Serba Dinamik Holdings Bhd, whose external auditor KPMG had raised red flags on its audit issues in 2021, due to common shareholder, Datuk Karim Abdullah.

Karim ceased to be a substantial shareholder in mid-January last year before KPower changed its name to Reneuco in September 2022. About a month after he sold its stake, KPower announced that it had received an award to take over and complete the EPCC of small hydropower plants in Kota Marudu, Sabah.

To recap, the contract was awarded by One River Power Sdn Bhd. In the announcement, KPower revealed that Mustakim was an interested director and major shareholder of the award, being a major shareholder of OHP Ventures Sdn Bhd — an indirect shareholder of One River.

Mustakim had an effective 70% interest in One River Power, according to the announcement.

In an interesting twist in April this year, Reneuco announced that it was buying Adat Sanjung, which used to be an associate of Serba Dinamik, for RM90 million, from OHP Ventures, a unit of OHP Capital.

The acquisition was completed last Wednesday. This means that Reneuco now owns 70% of One River Power which is the project owner of the three small hydropower plants in Kota Marudu, Sabah.

The remaining 30% stake in One River Power is owned by Inno Hydropower (B) Sdn Bhd, a wholly-owned subsidiary of state-owned Kumpulan Yayasan Sabah.

The purchase consideration was settled partially by RM20 million cash and the issuance of 318.18 million shares at 22 sen per consideration share to OHP Ventures.

“The acquisition will enable Reneuco to build its own capability in the renewable energy spectrum to fortify its position as a renewable energy company in Asean,” says Reneuco, adding that the acquisition will also increase its asset ownership of RE to about 120mw.

According to Reneuco, the contract for the three small hydropower plants has reached about 19% completion.

“Nevertheless, in view of its asset ownership programme that is intended to strengthen the group’s concession-based recurring income for long-term sustainability, the group has acquired Adat Sanjung, which is the beneficial owner of the development,” Reneuco tells The Edge.

Adat Sanjung had RM182.34 million in borrowings as at Dec 31, 2021, and expects to incur additional borrowings of about RM70 million for structural strengthening works as well as the remaining work for the completion of hydro Plant 1 in Upper Sungai Bengkoka and hydro Plant 3 in Sungai Togohu, Kota Marudu.

According to Reneuco, the estimated total cost of the hydropower project, including repair works, is roughly RM327.27 million.

The acquisition of Adat Sanjung is also earnings-diminishing for Reneuco on a proforma basis, based on the results for its financial year ended June 30, 2022 (FY2022).

After accounting for the audited loss after tax of Adat Sanjung for the FYE Dec 31, 2021 of RM11.36 million, Reneuco would have recorded a loss after tax of RM5.9 million in FY2022, on a proforma basis, compared with a profit after tax of RM5.95 million, the group revealed. The earnings per share would have been diluted from 1.1 sen in FY2022 to a loss per share of 0.55 sen.

Nevertheless, Reneuco states that notwithstanding the earnings-diminishing effect of the acquisition and barring any unforeseen circumstances, the acquisition is expected to contribute positively to the group’s consolidated earnings in the future financial years as and when the hydropower project commences operations and generates a steady stream of revenue and cash flow.

For the RM90 million paid for Adat Sanjung, the question is, how quickly will Reneuco see investment returns? 

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