Cypark: cloudy skies, at least in the short term

Still in the red without one-off adjustment

Cypark has announced its earnings result for the 3Q ended 31 January 2025 (November 2024 -Jan 2025). The firm has recorded total revenue of RM39.7 million for 3Q25, marking an 11% increase compared to 3Q24. Cypark also managed to stay in the black for the quarter, with net profit at RM14.7 million, largely due to the RM30 million one-off reversal of provision in renewable energy segment and the anticipated fire insurance compensation in WTE segment.

Without the one-off adjustment, Cypark would have recorded RM15.3 million in net loss. Delving into respective segment, the renewable energy did record a higher revenue of RM23.3 million in 3Q25 higher by 30% qoq. This is within our expectation as the revenue contribution from LSS3 plant has kicked in. In the next quarter, we will see contribution from Danau Tok Uban 1 and 2 from LSS2 projects, as DTU1 has reached COD on 31 Jan 2025 while DTU2 reached on 7 January 2025.

Tipping fee revision, at last

Cypark Resources Berhad has received a revision in the tipping fee for its Waste-to-Energy (WTE) facility from the Ministry of Housing and Local Government. As a result, we anticipate a one-off gain of RM39 million in the next quarter following this revision.

While the exact new tipping fee has not been disclosed, it is expected to align closely with the RM96 per tonne rate granted to Malakoff’s Sungai Udang WTE facility in Melaka.

It is unlikely that the tipping fee will match the RM55 per tonne rate given to KDEB Waste Management, the WTE plant operator in Selangor. This is because KDEB is a wholly owned subsidiary of the Selangor state government, allowing the corporation to operate with a low profit margin or even break even, as its primary aim is to serve the Selangor community.

Additionally, Cypark is permitted to submit a tipping fee review request every three years, with revisions subject to approval. As such, we can expect a moderate profit margin from the WTE facility at Ladang Tanah Merah, Negeri Sembilan.

The plant has been upgraded to process 1,000 tonnes of municipal waste per day, up from the previous capacity of 600 tonnes. With the partnership with China Tianying Inc. to deploy a plasma WTE line, the company remains confident in its projection to generate RM80 million in annual revenue from the WTE segment.

Walking on thin ice

We have reason to believe that Cypark is walking on thin ice, even with the completion of all delayed projects and hypothetically when WTE plant is operating at full capacity. According to BloombergNEF, the benchmark fixed opex for utility scale solar projects is $13,191/MW/year. Also, a typical WTE plant can achieve an operating margin of around 10-15%.

Revenue from the Construction & Engineering (C&E) segment and the Green Tech & Environmental Services segment has been highly volatile. The C&E segment's performance is dependent on availability of orderbook, while Green Tech segment has delivered only RM 2-3 million in profit before tax during favorable years.

Based on rough projection, excluding the two previously mentioned segments, the estimated annual operating profit in full swing (approx. RM 115.8 million) is insufficient to cover both financing costs—excluding perps (approx. RM 88.7 million per annum) and perpetuals distribution (approx. RM 32.7 mil a year).

Table 1: Renewable energy and WTE segments’ projection

To meet the two expenditures, the C&E and green tech segments would need to generate at least RM 6 million in operating profit, while this is highly achievable, it is by no means guaranteed.    

It’s also important to note that this projection assumes the smooth operations of its solar assets and that WTE plant runs at full potential, which is currently not the case for WTE. Looking at 9 months ended 31 Jan 2025, WTE has generated only RM39.5 million in revenue, still significantly below the projected RM80 million at full capacity.

Thus, generating additional revenue to cover the perpetual distribution remains a challenge for Cypark, at least in the short term. The company will need to improve its business efficiency to meet perpetuals distribution. Thus, we do not rule out the possibility of further deferral of perpetual distribution.

What then for bondholders?

While the resumption of perps distribution on 4 March 2025 signals management’s intention to make good, but the continuous ability to do so remains dubious, at least in the short term.

We continue to advocate bondholders in series 1-4 to hold their positions. For series 5 to 10, we believe holding these positions as the better alternative as well, though bondholders in these series would have to be cognisant of the higher risk they are bearing (redemption of series 1 to 4 will deplete a significant portion of the reserve account balance by Sep 2027).

Here’s why:

1) Principal continues to accumulate. The principal continues to accumulate and remains in compliance with minimum sinking fund requirements. As of 2 April 2025, the reserve balance stood at RM113.4 million, ahead of the mandated RM110.7 million by June 2025. This is expected to continue partly due to the ring-fenced solar projects (Project Ambang Fiesta, Project Gaya Dunia, Project Pajam, Project Rentak Raya) has taken up insurance to insure machinery breakdown loss of profits.

2) Reserve account cannot be used for other purposes. The reserve account balance is restricted to redemption purposes only. Based on current trends, Cypark is expected to have enough reserve funds by September 2027 to redeem the principal portion of Series 1-4. This increases the likelihood of a call, as the reserve balance cannot be utilised for other purposes other than meeting principal redemption if the issuer chooses to exercises the call option. This also applies to Series 5-10, although the reserve account will need to be recapitalized after September 2027.

3) Secured solar projects retain business value. The 24MWac of solar projects are ring-fenced under tranche 1 perps and can only be released once Cypark redeems the perps. This creates an incentive to redeem the perps, especially since the estimated operational lifespan of the PV modules is around 30-35 years. The four projects, launched around 2012, still have approximately 12 years of productive power generation left, although Cypark will need to renegotiate the rights to the project sites and solar tariff rates around 2033.

4) Non call event will increase coupon rates. If the perps are not called by 3 September 2027, the coupon rate for series 1-4 will reset to 8.5% for the first year, with additional 1% added each subsequent anniversary year while series 5-10 will reset to 11.5% if not called by 4 September 2030. With such high interest rate, a non-call event is tantamount to exaggerating the financing cost issue, making it more difficult for Cypark to recover, unless the company opts to forgo its perpetuals obligation.

5) There’s still time for business improvement. There’s still close to 2.5 years before the first call date for series 1-4 perps. Hence, there’s time for Cypark to improve on business front, whether from German Technology Park (Melaka),the Tasik Kenyir project or other upcoming initiatives, to make good on previous deferred and future coupons. 

The silver lining is at least bondholders can be comforted by higher certainty on their principal portion, while coupon distribution portion would depend on how Cypark’s operation performs.

14 September 2026: A key test for perpetuals management

A critical reference point for assessing Cypark’s commitment to its perpetual obligations will be how it handles Jakel Capital’s RM265 million perpetual securities, which reach their first call date on 14 September 2026. The current distribution rate stands at 6.50%, but if not called, it will reset to 8.0%, with a further 1.0% increase per annum thereafter.

This situation is notably more complex compared to Tranche 1 perps, as there are no secured solar projects supporting Jakel’s perps. This means that, for redemption to occur, Cypark would need to either fund it through operating cash flow or refinance via the debt market—an option that will test both market confidence and the company’s creditworthiness.

It’s also worth noting that coupons for this tranche have been deferred twice in the past, adding further pressure and scrutiny to management’s next move.

In comparison, Tranche 1 perpholders are in a stronger position, supported by ring-fenced solar projects and a clearer path to principal redemption. The outcome of the Jakel Capital perp call will likely serve as a broader indicator of Cypark’s ability and willingness to meet its obligations under tighter financial conditions

All in all

In summary, our greater concern lies with the coupon distribution rather than the principal repayment. While we do not rule out the possibility of further coupon deferrals, it's important to note that Cypark is obligated to repay the nominal value of the perpetual sukuk, along with any unpaid deferred distributions and accrued interest, in the event of a redemption on or after the first call date.

That said, in a less optimistic scenario—where Cypark intends to redeem the perps but is unable to meet its coupon distribution obligations—a bond restructuring, potentially involving a waiver of coupon payments, remains a possibility in the back of our minds.

We continue to recommend a hold / wait-and-see approach, allowing time for the principal to keep accumulating through secured projects, while monitoring whether Cypark’s operational performance and financial position improve meaningfully in the coming quarters.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a NIL position in the abovementioned securities.