Project background
Cypark Renewable Energy Sdn Bhd (CRE) has a power purchase agreement with Tenaga Nasional Berhad (TNB) to build-and-operate four solar photovoltaic power plants in peninsular Malaysia. The project undertaken includes solar plants at Empangan Kelinchi (49 Megawatt peak or MWp) and Empangan Sungai Terip (49 MWp) at Negeri Sembilan, Sik, Kedah (49 MWp), and Merchang, Terengganu (172 MWp) (Project Cyclone). With a total contract value of RM1.2 bil, the sales of electricity generated from this project will be ring-fenced towards Tranche 1 of perpetual Sukuk Musharakah (the perps).
Operational performance
Exhibit
1: M-o-m output volume and payment amount (Sept 2020-Nov 2021)
Source: iFAST compilation; CRE
As the largest installed capacity among the four solar plants is located at the east coast Malaysia (Merchang, Terengganu), overall performance would therefore have a large exposure to wet weather conditions. As shown in Exhibit 1, output volume generated during the monsoon seasons (Sept 2020-March 2021) has decreased, albeit minimal, around 2.38 million kWh compared to 2.62 million kWh between Apr 2021-Aug 2021.
Between Sept 2021 and Nov 2021, output volume approximately 2.37 million kWh – similar to the previous monsoon level – reflecting a strong consistency of overall plant performance to climate changes. Therefore, we can observe that the operational performance under all-four projects has been relatively stable since September 2020 i.e., the first issuance month of the perps.
Financial assessment
- Profitability
Exhibit 2: Selected key financial indicators (RM mil unless indicated otherwise)
| FYE Oct | FY2019 | FY2018 |
| Revenue | 266.2 | 196.2 |
| Gross profit | 62.6 | 36.3 |
| Operating profit | 48.8 | 30.3 |
| Profit after tax | 34.9 | 22.8 |
| Operating profit margin (%) | 18.3 | 15.4 |
Based on the financial year ending October 30, 2019, (FY2019), CRE posted revenue of RM266.2 mil, up 35.6% from the previous corresponding year. Its operating profit also jumped 61% to RM48.8 million, supported by higher plant efficiency and increasing electricity demand. As a result, CRE continued to report a strong operating profit margin close to 20% in FY2019, which suggests excellent operational efficiency of the project.
- Strong liquidity position supported by CRE’s solar business
Payments from TNB is proportional to the level of output produced by the project. Under the PPA, 95% of the total proceeds from sales of electricity to TNB will be tied up to the Designated Accounts. The designated accounts comprise Revenue Account and Reserve Account, both solely managed by Security Trustee. Funds in the designated accounts will be used to finance all obligations under the perps.
Over the past 15 months (from Sept 2020 to Nov 2021), CRE has received RM35.2 million energy payments from electric sales from offtaker, TNB. As required under the terms, RM33.4 million of the total has been transferred into the Revenue Account in a timely manner to fulfill the financial obligations under the perps.
Based on the total outstanding amount of RM209.6 million and assuming a profit rate of 6.7%, the RM33.4 mill available in the RA translates to a proceeds-to-interest cover ratio of 2.4x. This means that CRE has strong liquidity profile to meet its financial commitments for the next two years, while the Reserve Account continues to build up
- Zero completion risk and minimal performance risk
The project has no completion risk as all plants secured for the First Tranche have been completed and operating since 2012. Meanwhile, the performance risks are mainly driven by climate conditions in Malaysia, which has relatively little seasonal variability in average monthly temperature.
According to Climate Change Knowledge Portal (CCKP), Malaysia has about 1°C difference between minimum of 24.9°C in January and maximum of 25.9°C in May. Hottest months of the year are between April and June.
Exhibit 3: Monthly climatology of min-, mean-, max-temperature and precipitation from 1991-2020
Source: CCKP
Protection to Investors
The following are some selected protective mechanism built under the transaction to provide default-risk protection for investors:
* If the above requirements are not met, a maximum profit rate of 15% on the issuance shall be applicable.
Coupon step-up margin
In the event of a non-call on the predetermined First Callable date, the relevant periodic distribution rate (i.e., coupon rate) will be ‘reset’ to a new rate, as illustrated below:
Series 1-4: First callable date on September 4, 2027
For Series 1-4, there is a coupon step-up of 2% p.a. on the prevailing coupon rate which is effective on the first year commencing after the first call date i.e., September 4, 2027. On each anniversary of the Call Date thereafter, 1% p.a. shall be added to the prevailing rate, not exceeding the maximum rate of 15% p.a..
Series 5-7: First callable date on September 4, 2031
As for Series 5-7, there is an additional 4.65% to the prevailing coupon rate 6.85%, effective on the first year after the first call date i.e., September 4, 2031. This, translates to coupon rate of 11.5%. On the succeeding anniversaries of the call date(s), the increment will be 1% p.a., subject to a maximum rate of 15% p.a..
Conclusion
Despite the stellar record in operating and financial performance in engineering, procurement, construction and commissioning business of the Cyclone Project, an unprecedented climate change will remain as a key challenge to CRE’s operational performance.
However, Issuer is not expected to encounter liquidity issues in the near-to-medium term, given its robust financial performance as well as strong liquidity position to meet any coupon requirement when it comes due.
We think that the bonds available are attractive. Moderately aggressive investors could consider them. Its tranche 1 Series 1-4 (callable in 2027) and Series 5-7 (callable in 2031) under the perps with yield-to-worst of 6.910% and 7.020% are available on Bond Express.
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 hold a NIL position in the abovementioned securities.
