This article first appeared in Capital, The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

WHILE the overall stock market sentiment looks gloomy, the initial public offering (IPO) scene remains buoyant, with several listings attracting investor interest.

Solar District Cooling Group Bhd (KL:SDCG) saw its IPO oversubscribed by 144 times for the 21.19 million new shares offered to the Malaysian public. In total, the IPO received 31,678 applications from the Malaysian public asking for 3.07 billion shares worth a whopping RM1.17 billion, indicating a strong interest in growth stocks in the market.

Unlike other Bursa Malaysia renewable energy (RE) players, which are mainly involved in the construction of solar farms and asset owners, Solar District carved its niche on the services side providing building management systems (BMS), solar thermal systems and energy saving solutions.

The company provides energy-efficient solutions for public hospitals, specialising in hybrid solar thermal hot water systems and LED lighting retrofits. It also undertakes system and equipment maintenance projects, including gas-fired chillers and chilled water systems.

Its top clients — a concession company, a construction company, a facilities management company and a building owner — accounted for more than half of its total revenue for the financial year 2023 (FY2023).

“The nature of our business comprises project-based revenue and ad hoc maintenance services, which generate non-recurrent revenue.

“Our business is typically based on competitive bidding or requests for proposals. As such, we have to continually submit bids and proposals to compete against other service providers in order to secure new projects,” Solar District states in its IPO prospectus.

Solar District’s IPO, which closed its application on Sept 6, was priced at 38 sen per share, involving a public issue of 118.67 million new shares, with no separate tranche for the sale of existing shares.  The new share issuance represents about 28% of the enlarged total number of shares of Solar District.

The company is raising RM45.1 million, the bulk of which will be utilised to purchase materials and for working capital for expansion.

It has allocated some 41.5% of the IPO proceeds for the purchase of materials, 28.1% for general working capital, 11.1% for tender bonds for future projects, 9.5% for listing expenses, 5.6% for capital expenditure and 4.2% for the expansion of its headquarters.

RHB Research estimates Solar District shares to be fairly valued at 46 sen apiece based on 21 times price-earnings ratio (PER) for its financial year ending Dec 31, 2025 (FY2025) forecast earnings. This is almost 21% higher than the company’s IPO price.

According to the research house, the valuation at 21 times PER is in line with the weighted industry average of its selected peers but at a 5% premium to its closest peer KJTS Group Bhd (KL:KJTS). It points out that the PER of 21 times is because Solar District’s business model fetches a higher margin (FY2023: 22.9%) compared with KJTS (FY2023: 6.8%).

Shares in KJTS closed at 64 sen last Thursday giving it a market capitalisation of RM436.98 million.

When Solar District lists this Thursday, Sept 19, it is expected to have a market capitalisation of RM161.05 million, based on its enlarged issued share capital of 423.82 million shares and issue price of 38 sen.

In terms of earnings, the group posted a 22.4% jump in net profit to RM6.46 million in FY2023 from RM5.18 million a year earlier, on the back of a 42.8% surge in revenue to RM26.62 million from RM18.65 million previously. Its net profit margin fell to 23.8% in FY2023, from 27.8% in FY2022.

As at July 29, the company had a total unbilled order book of RM22.78 million, and it expects to recognise about 72% of this as revenue in FY2024, with the remaining 27.7% to be recognised in FY2025.

Between FY2020 and FY2023, Solar District’s revenue achieved a compound annual growth rate (CAGR) of 16%, while net profit grew at 33.7%.

BMS was the group’s main earnings driver, accounting for 75.5% of revenue, while the remaining 21.5% came from its solar thermal systems and energy saving services.

RHB expects Solar District’s revenue to grow at a three-year CAGR of 23.6% compared with its historical achievement, fuelled by opportunities in retrofitting existing buildings and new construction projects.

“With seven energy performance service contracts for hospitals, the group is well-positioned to capture more business from the 160 public hospitals in operation. It also plans to expand into the private hospital sector, data centres, and other building types,” RHB says.

Solar District has a track record of more than 17 years in the industry. It ventured into solar thermal hot water systems in 2010 and energy performance services in 2019.

The company does not have a dividend policy. Nonetheless, TA Securities Research points out that the group had paid out 32% to 121% of net profit as dividends for FY2021 to FY2023.

“Going forward, we reckon Solar District should be able to pay out at least 20% of earnings as dividends given strong operating cash flows,” it says.

The company is led by husband-and-wife team Edison Kong and Eileen Liuk. Kong is managing director and Liuk is executive director. They have been with the company for the last 17 years.

After the listing, the duo will collectively own 72% of Solar District.

Mercury Securities Sdn Bhd is the principal adviser, sponsor, underwriter and placement agent for the IPO.

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