Tuesday, October 2, 2012

Cypark The Risk !!!

Have been searching high and low about Cypark. After reading a 28 pages of report by CIMB, this is the things that concern me most. I would copy and paste here for you guys to digest. You are welcome to tell me do you think.... Share your thought. Let's make the buck together .. Happy Trading ...



4. RISKS AND MITIGANTS


4.1 Continuity is not certain
Malaysia’s 13th general election must be held by mid-2013. However, many believe that it will be held in 2012. The outcome may result in high-level personnel changes, which could alter the thinking and motivation behind the government’s RE initiatives. If so, we would have to re-evaluate our view on Cypark. However, we believe that the RE initiatives being discussed are not only relevant but politically neutral and stand a high chance of being successfully implemented.

4.2 Change of long-run energy targets
We also understand that the long-run fuel mix of Malaysia is under review. In 2011, nuclear energy was seriously discussed but the EC put this option on the backburner after the Mar earthquake and tsunami in Fukushima, Japan. The importation of hydro energy from Sarawak has also been explored but this initiative was put on hold in 2010. In light of the gas shortage in 2011, we gather that the Energy Ministry is rethinking Malaysia’s long-run fuel requirements. This could result in a lowering of RE targets.

4.3 High-capex expansion plans
Cypark intends to finance up to 80% of its RM735m capex over the next two years (up to FY14) via bank borrowings. This implies an additional RM588m of debt for Cypark, which would raise FY13 net gearing to 258% of total equity. While this is an aggressive plan, note that Tenaga is the offtaker. We believe this mitigates the risk of default given the government’s emphasis on raising the RE contribution in Malaysia. Cypark’s high leverage is further mitigated by the company’s high interest cover, which by FY13 would be around 4.1x.

4.4 Unable to raise debt financing
Over the next three years, we expect Cypark to require RM735m capex to carry out its expansion programmes. In the worst-case scenario of it being unable to secure debt financing and needing to raise the entire amount via equity, the company may issue up to 387m shares, enlarging its share base by 2.3x and may dilute its share price by 71% (based on RM1.90). Note that in Mar 2012, Cypark raised RM26m by placing out 14.5m new shares at RM1.80 per share to institutional shareholders. While this is a concern, Cypark’s success with its 8MW project in Pajam suggests that management has the ability and credibility to secure funding for future projects.

4.5 Short track record
Over a short period of two years, Cypark intends to turn itself from a landfill contractor into a pure RE developer. This would require management to adapt quickly and acquire a net set of skill sets. Also, the FiT mechanism was only formalised in Dec 2011 and Cypark will be among the first to use the new system. This entails operational procedures that have not been tested.

Despite these challenges, we believe that Cypark’s management possess the creativity and drive to implement its RE projects successfully. The company’s first solar project in Pajam was installed as an entry point project (EPP) with the backing of the government’s Performance Management & Delivery Unit
(Pemandu). With this support, we believe that Cypark is in a good position to execute its aggressive goal of building 52MW of additional RE capacity in FY13.

5. FINANCIALS

5.1 Long-dated cash flows
As Cypark transforms itself from a landfill contractor to a pure RE developer, the company’s cash flows will become increasingly stable and long-tenured. For example, we forecast Cypark to generate RM200m in landfill contract revenue in FY12, making up 89% of total revenue. From FY13 onwards, Cypark’s revenue
profile will change dramatically. By FY16, we expect Cypark to generate only RM100m (37%) in landfill revenue but RM147m in revenue from RE PPA contracts with Tenaga (63%).

5.2 Earnings set to soar in 2013
With the Pajam integrated RE plant (10MW of RE) under its belt, Cypark now has the credibility to implement additional RE projects. The Pajam plant will contribute RM18m annual revenue (RM11m from solar and RM7m from biogas), starting from Mar 2012. In addition to the Pajam plant, we expect Cypark to build an additional 30MW of solar capacity and 27MW of biogas capacity in FY12. With all of these projects up and running by FY13, capacity will jump eightfold to 60MW and output will rise by 13x to 265k MWh. The solar FiT in 2012 is RM0.95/Kwh for 21 years. The FiT mechanism (see Appendix 5 for details) encourages RE developers to launch their projects early as the solar FiT tariff will be lowered by 8% (degression rate) per year, i.e. an RE developer launching a solar farm in 2013 will be paid RM0.874/Kwh or 8% less than the 2012 rate. The FiT mechanism provides an additional tariff (bonus) to developers using local equipment. However, we do not expect Cypark to earn any bonus payments for its solar venture as the company will not be using any local equipment.
For Cypark’s biogas plants, Cypark will earn RM0.42/Kwh for each unit of RE generated over 16 years. This includes RM0.32/Kwh as the base FiT plus a RM0.1/Kwh bonus payment for efficient gas plants (RM0.02/Kwh) and the use of landfill waste as fuel (RM0.08/Kwh).
As a result, we estimate that FY13 core EPS will surge by 91% to RM0.32. At the same time, we gather that Cypark’s board will seek to raise the company’s dividend payout to up to 50% in FY13 from 25% currently. Our forecast is more conservative and models a 40% dividend payout by 2013. While gearing is high, Cypark should be able to raise its dividend payout because borrowings will be project specific and will be ringfenced at the project level.

5.3 New model enhances cash cycle
We expect Cypark’s cash flow profile to improve significantly from 2012 onwards as the company begins its transition from a contract based model to a full-fledged RE developer. For example, in FY10/11, the company had RM256m in accounts receivables or 1.6x the revenue generated in the same year. This is because Cypark’s old business model depended on the Ministry of Housing to pay it for its landfill services. Over the next two years, we expect the company to unlock RM100m in receivables for services rendered in prior periods. This will help the company to partially fund its RM735m FY12-14 capex programme.
We expect Cypark to receive payment from Tenaga 21 days after the company bills Tenaga. Previously, Cypark took almost a year to convert sales into cash (FY11 conversion cycle was 335 days). Our analysis suggests that in FY13, as Cypark winds down its landfill contract business, its cash conversion cycle
will fall to 81 days or under three months.

5.4 Higher payout from FY13 onwards
Given the expected improvement in Cypark’s cash conversion cycle and cashflow from operations, management is committed to raising the group’s dividend payout from 25% of net profit to up to 50% once its RE projects stabilise. Our forecast factors in 40% dividend payout from FY13 onwards, below management’s guidance. As a result, we expect net yields to increase from 1.4% in FY10 to 6.4% in FY13 (Figure 24). This would put Cypark in the ranks of the highest-yielding stocks in our Malaysian coverage.

5.5 Debt backed by long-term cash flow
While total debt is expected to rise from RM116m in FY11 to RM559m in FY13,
RM448m or 87% are long-term borrowings (8-12 tenure) backed by long-term
agreements signed with Tenaga. As Malaysia’s national utility and the country’s
sole offtaker, Tenaga is, we believe, too big too fail and has an implicit guarantee
from the Ministry of Finance through its 35% shareholder, Khazanah Nasional.