Credit update: One of the largest BIOGAS power plant players - CENERGI SEA

Highlight:

·         In FY22, revenue contribution from concession-based projects was about 66% to the group revenue.

·         In 8M23, interest coverage ratio and net debt to EBIT were 1.5x and 11x respectively, indicating greater financial risk.

·         El Nino phenomenon might affect the production of palm tree adversely, causing lower volume of raw material to produce biogas – POME

·         Our view is the company should not fall into default case, but their current financials are weak. Investors could look for alternative by other issuers with similar bond yield.  

Introduction

Cenergi Sea is operating in 3 major business segments: renewable energy (RE), energy efficiency and new ventures. Cenergi is a premier sustainable energy solutions company specialising in reducing carbon emissions through investment in RE and Energy Efficiency projects.

Under RE segment, the company is producing sustainable energy by utilising biogas, biomass, solar, small hydro and wind. Biogas can be generated and sold to Tenaga Nasional Berhad or Sabah Electricity Sdn Bhd through the Feed-In-Tariff (FIT) scheme.

The group has also entered into a 20-year Power Purchase Agreement with Perusahaan Listrik Negara, Indonesian government-owned utility provider for 3MW biogas power plant (Lampung 3.0MW Biogas Power Plant).

The purpose of energy efficiency segment is to promote a sustainable future, Cenergi offers Energy Savings Performance Agreement. Cenergi will only get paid when their clients successfully secure profit from the energy-efficient strategies.

Also, as a part of the business segment, the company is looking for new opportunities and venturing into potential renewable energy market.

Moreover, Cenergi is one of the largest grid-connected Palm Oil Mill Effluent (POME) biogas player in Malaysia. The group currently has 23 biogas power plants in Malaysia and Indonesia, with a total generation capacity of 39.6 megawatt (MW). Also, the group has around 20 solar projects (comprising solar farms and rooftop solar) with total capacity over 37.6 MW across the country.

Basically, fresh fruit bunches are harvested from palm tree then it will be processed in the mill to extract Crude Palm Oil. POME is the liquid waste produced from the extraction process and it becomes the raw material that will be used to produce biogas. Availability of POME subjects to the seasonality of fresh fruit bunches.

 Figure 1: POME Biogas Process

As of today, the group has successfully avoided over 2.4 million tons of carbon emissions.

Industry outlook

National Energy Transition Roadmap (NETR) had been launched by the Ministry of Economy (MoE) Malaysia, outlining Malaysia’s efforts towards achieving a sustainable and inclusive energy system. Under the NETR, Malaysian government is encouraging expansion of RE development, including scale-up installation of solar systems in government buildings. In line with the development of NETR, Malaysia is targeted to have installed RE capacity of 40% in 2040 and 70% in 2050 (2023: 25%). 

Chart 1: New Build PV Annually

*Additional solar PV capacity can be used as a proxy of demand for solar energy

**PV =Photovoltaic

The chart above shows the increasing demand for solar energy over the past 13 years. The tremendous additional growth annually indicating stronger demand for RE. It is becoming more common and is widely used in Malaysia.

In line with the roadmap, Malaysia is in the midst of transition to renewable energy. With this, we are optimistic towards the Cenergi business outlook and we are confident that it is able to capture more market shares in the future.

RAM upgraded Cenergi’s ratings followed by the acquisition of UEM

On 16 August 2023, UEM Group Bhd has completed the acquisition of majority stake from Khazanah Nasional Bhd. Now, UEM becomes the largest shareholder of Cenergi Sea. Subsequently. RAM upgraded Cenergi’s credit ratings attributable to a better prospect.

Khazanah Nasional Bhd is the sovereign wealth fund of Malaysia, also the parent company of UEM group. Khazanah does not directly hold Cenergi’s stakes anymore.

UEM Group, subsidiary of Khazanah, involved in the development of infrastructure projects in Malaysia, including green industries.

The acquisition will provide Cenergi a comprehensive support in terms of expertise and resources and contribute significantly to Malaysia’s sustainable future. This also provides Cenergi with some buffers against financial distress as the parent company is able to provide explicit financial backing.

Table 1: Credit ratings

Stable business model along with aggressive expansion plan

·         Relatively stable cashflow from concession-based projects

All the biogas plants and solar farm of Cenergi are backed by Renewable Energy Power Purchase Agreements (REPPAs) with Tenaga Nasional Berhad, ranging from 16 to 21 years. With REPPAs, the group is allowed sell its electricity generated from its biogas and solar plants and to Tenaga Nasional Berhad. This will be providing steady and consistent cashflow to the group in the future.

Revenue generated from concession-based projects has contributed significantly to the group revenue. In FY2022, revenue generated from biogas plants and solar farm was RM 47 mil and RM 6.1 mil respectively, which was about 66% of the group revenue.

·         Biogas REPPA is favourable

The performance obligation of REPPA is 70% of Declared Annual Availability (DAA). DAA is referring to annual renewable energy output generated by the renewable energy installation (in MWh). Biogas REPPA is more favourable than Power Purchase Agreement as there is no penalty for underperformance. Failure to meet the performance obligation will result in downward revision of DAA in the following year, no penalty will be given.

·         Expansion Plan

Cenergi is actively expanding its business and slowly take place as a green champion in the industry. There are 9 biogas power plants with a total capacity of 14.5 MW and 1 solar farm with capacity of 11.4 MW are under construction. We believe this will boost the group’s revenue upon completion.

Weak Financials due to highly leveraged position

***Cenergi is not a listed company, it is not easy to assess its financial status as info is not publicly available

Chart 2: Segmental Revenue (RM’ million)

Table 2: Selected profitability Indicator (RM’ mil, unless otherwise stated)

Table 3: Selected cash flow and leverage ratio (RM’ mil, unless otherwise stated)

***latest operating cashflow is unavailable

Revenue contribution from construction segment dropped significantly in FY22 due to lower demand from customers during the year.

Cenergi recorded an increase of 83% of PBT to RM 4.4 mil as compared to RM 2.4 mil in FY2022 due to lower administrative expenses. Operating profit margin also increased to 23.9% from 15.8% in FY2022 attributable to lower revenue.

Despite the consistent positive figures in terms of operating cash flow, it shows a weak level of interest coverage ratio, and it has maintained the ratio between 1x – 1.5x over the past few years.

The company had a relatively high net gearing ratio of 0.7x and net debt to EBIT of 11x in 8M23, indicating the company’s highly leveraged level. Investors have to be cautious and always keep an eye on the company’s news as they are having greater financial risk.

Although we see the supportive stance from the government of Malaysia where they rolled out biogas e-bidding and increased the quota offered in 2023 where Cenergi might be benefited from the initiatives.

Nevertheless, we will remain cautious as Cenergi shows a weak financial profile despite the improved PBT and profit margin. In addition, we view that the revenue from construction projects will remain unstable in the future.

Risk

Feedstock risk

As mentioned, Cenergi Sea is one of the largest biogas players in Malaysia. Shortage of the raw material - POME has been identified as the most operational issues in biogas power generation.

In addition, Malaysia is now being impacted by El Nino phenomenon, and the adverse weather condition is expected to grow towards the beginning of 2024. It might affect the production of palm tree and subsequently affecting the raw material to produce biogas – POME, causing lower production of biogas to generate electricity.

Regulatory Risk

Most of the Cenergi’s projects are concession based. This is also indicating that the Cenergi’s financial performance will be driven by the government’s policy. Any change in policy such as RE quota allocation and continuation of FIT programme will have significant impact to the group. 

Conclusion

Table 4: Cenergi Issuance

Based on our analysis on the financials of Cenergi, PBT and operating profit margin continued to increase in 8M23.

It is undeniable that the revenue contribution from energy segment is quite stable, however, revenue from construction segment is volatile as the project is not guaranteed. We view that instability of construction segment will have significant impact to the group.

Although the overall business model is relatively stable, and Malaysia is transitioning to green energy, which might be benefiting Cenergi, but this is also indicating there is a likelihood that the government will cut the tariffs rate and more competitors will join the industry, which might be adversely affecting profitability of Cenergi.

Our view is the company should not fall into default case, but their current financials are weak. Investors could look for alternative by other issuers with similar bond yield.  

However, since the sukuk liquidity is currently low, existing holders should hold the bond. Meanwhile, investors should monitor closely on the company’s news as well as government’s policy in regards with the development of RE.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in CENESE 5.300% 23Dec2026 Corp (MYR) and the analyst who produced this report hold a NIL position in the abovementioned securities.