Cypark’s debt and cash flow problems scare investors

The share price of renewable energy (RE) company Cypark Resources Bhd saw a slump last week on concerns about its debt and cash position as well as its ability to execute the energy projects it has in hand.

The main market-listed company’s shares plunged 41% in a week from 69 sen on May 20 to 40.5 sen last Friday, translating into a market capitalization of RM241.57 million. After a 55% drop year-to-date, the meter is currently trading at an all-time price-earnings (PER) ratio of just three times.

Concerns have been raised over construction delays for Cypark’s ongoing projects, including its floating solar power plant at Tasik Danau Tok Uban (DTU), Pasir Mas, Kelantan, and its modular advanced solid waste recovery and treatment plant in energy (SMART WTE) at Ladang Tanah Merah, Negeri Sembilan.

Cypark Group CEO and non-independent executive director Datuk Daud Ahmad, it seems, is trying to appease investors.

In a forwarded message seen by The Edge, a research analyst who claims to have contacted Daud says that management reaffirms that there is no change in the fundamentals of the Cypark company, while business remains at status quo.

For the floating solar project at DTU, Daud apparently told the analyst that the installation of the solar panels has been completed and that he is waiting for the construction of Tenaga Nasional Bhd’s infrastructure, such as grid connection. Overall, the project is 85% complete.

According to him, the 20mw SMART WTE project is still in the testing and commissioning stage, while earlier delays were mainly due to travel restrictions, as foreign experts were only allowed to enter Malaysia. from April.

Cypark apparently expects the new commercial operation target date (COD) for both plants to be in September. Management also seems to have indicated that Cypark does not need additional funding for its ongoing projects, as the group has secured sufficient funds through its latest equity offerings.

As of press time, Daud has not responded to requests for comment from The Edge, nor verified that he has spoken to the analyst.

A 56-year-old accountant by profession, Daud co-founded Cypark in 1999 and is the largest shareholder with a working interest of 6.92%.

The employee provident fund board holds a 5.95% stake in the company, which is currently undertaking the operation and development of 400mW of renewable energy projects in Malaysia.

Another major shareholder of Cypark is AmanahRaya Trustee Bhd, which owns around 5%. Among its top 30 shareholders are Public Smallcap Fund, Lembaga Tabung Haji and Phillip Capital Management Sdn Bhd.

A market watcher attributes Cypark’s share price crash last week to margin calls and pressure from short selling.

“There were rumors of something brewing within the company. But the real concerns are whether or not Cypark can deliver its projects on time. There are concerns about how Cypark could honor its debt obligation [given the delay in projects].”

He points out that some quarters had previously raised concerns that Cypark’s cash flow could be strangled by its floating solar projects.

“But then again, we talked about it over the last two or three years. If these projects are really causing cash flow problems for Cypark, then management needs to find ways to remedy the situation urgently. The last thing you want to see is a bond default because that will really undermine investor confidence,” he warns.

Meanwhile, a solar industry expert thinks Cypark has good solar assets and solid businesses in its stable but, obviously, it has some issues on its plate.

“For those who have followed Cypark, they should know that it still has these potential risks. If you look at their intangible assets, their cash flow and their leverage, those numbers don’t look good,” he says.

Nonetheless, he acknowledges that overall market sentiment has been weak recently and as a result there is little buying interest in his stock.

“Not only do the major shareholders lack the financial resources to stabilize its stock price, but even worse, they seem to be getting margin calls themselves,” he says.

Interestingly, Cypark has been reasonably profitable over the past five years despite the delay in projects. Its net profit increased from RM57.6 million in the year ended 31 October 2017 (FY2017), to RM81.75 million in FY2018 and to RM91.28 million in FY2019, before declining to RM70.65 million in FY2020 and then rebounding. to RM75.25 million in FY2021 (see table).

For perspective, Cypark generated a pre-tax profit of RM96.63 million in the 2021 financial year, of which 77% came from its ER division, 15% from waste management and WTE, 7% from construction and engineering, and the remaining 1% ecology. technological and environmental.

Despite setbacks at its DTU and SMART WTE plant, Cypark managed to achieve COD for its ground-mounted solar power plant in Sik, Kedah on January 1 this year, ahead of the COD date approved by its client. In addition, Cypark’s biogas plant in Kg Gajah, Perak also successfully reached its COD on December 31 last year.

According to its 2021 annual report, the DTU and SMART WTE plants, as well as the 172 MW third cycle of its utility-scale solar project (LSS3) in Merchang, Terengganu, are expected to be completed and operational this year.

It should also be noted that Cypark was awarded a solar project in Kuantan, Pahang in June last year under Net Energy Metering System 3.0. This is expected to be completed in June 2023 with a contractual term of 21 years on net electricity production.

RAM downgrades Cypark SRI sukuks

Last December, RAM Rating Services Bhd downgraded the outlook for Cypark Ref Sdn Bhd’s Sustainable and Responsible Investment (SRI) program Sukuk Murabahah (2019/2041) from RM550 million to negative from stable, while reaffirming the rating AA3 of the facility.

Cypark Ref, an indirect 100% subsidiary of Cypark, is a financing conduit set up to raise funds for the development of LSS2 projects held by three entities, namely Viva Solar Sdn Bhd, Cove Suria Sdn Bhd and Cypark Estuary Solar Sdn Bhd.

After completion, Cypark Ref will receive deferred turnkey contract payments from these three project companies to honor its sukuk obligations.

Viva Solar is undertaking the 49 MW ground-mounted solar plant at Kedah, while Cove Suria and Cypark Estuary Solar are undertaking the 98 MW DTU plants at Kelantan.

According to RAM Ratings, the negative outlook reflects the potential downside of prolonged delays in the construction of the two floating solar power plants at DTU.

“Delays beyond our June 30 stressed assumption (Management’s base case scenario: March 31) could lead to further illiquidity in the transaction. We have reaffirmed the rating given the irrevocable liquidity bank guarantee and expected unconditional loan of RM26 million – which will be secured by deal sponsor Cypark Resources for the benefit of Cypark Ref – which would replenish the loss of cash flow due to delays in our sensitive case,” the credit rating agency said. written on December 17 last year.

However, RAM Ratings believes that the liquidity bank guarantee will provide much-needed support to help Cypark Ref overcome a potential default in June this year and restore the transaction’s liquidity reserves to a level consistent with the AA3 rating.

In a filing with Bursa Malaysia last Friday, Cypark announced that RAM Ratings has again reaffirmed the long-term rating of AA3 for its SRI sukuk via its letter dated May 26.

“The AA3 rating indicates high security for the payment of financial obligations. The rating outlook is maintained at negative to reflect RAM Ratings’ concerns over extended construction delays for the two floating solar power plants at DTU beyond its stressed schedule,” it notes. Cypark adds that RAM Ratings’ rating assessment also took into account the Extraordinary Resolution Notice that was distributed to sukuk holders on May 23.

“These changes, including changes to transaction terms and payment structure, are not opposed to the issue’s rating. The reaffirmation of the rating to AA3 should give confidence to sukuk holders to favorably support the amendments. proposed in the extraordinary resolution”, he underlines.

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