PETALING JAYA: With Malaysia expected to aggressively ramp up the installed capacity for renewable energy (RE), particularly solar, there is a likelihood of a huge pipeline of projects for players.
UOB Kay Hian (UOBKH) Research, in a report initiating coverage on the RE sector, expects a total value of RM5.6bil to RM7bil in engineering, procurement, construction and commissioning (EPCC) contracts to be rolled out in the next one to two years under the Corporate Green Power Programme (CGPP) and the fifth round of the Large-Scale Solar (LSS5).
“Multiple solar projects with a total capacity allocation of 2,800MW will be awarded through the CGPP and LSS5 schemes in the coming one to two years.
“Assuming a construction cost of RM2mil to RM2.5mil per MW, we estimate total EPCC replenishment opportunities at a staggering RM5.6bil to RM7bil in the next one to two years,” it added.
The research house said EPCC margins for the projects would likely be better than that for LLS4 given the former’s higher tariffs.
“Our channel checks suggest that the typical gross margins for utility-scale solar power projects would be in the range of 10% to 15%.
“While we expect gross margins for LSS4 projects to be lower in the range of 8% to 10% due to an unexpected rise in input costs and a drop in tariffs, we believe the margins would revert to normal for projects, and this would propel the earnings growth trajectory of solar companies that secured the projects,” said the research house.
It pointed out that solar companies would build up a resilient recurring income stream through ownership of solar assets under various schemes, such as Net Energy Metering, LSS and CGPP.
These assets will comprise rooftop solar photovoltaic systems and large-scale solar plants.
For instance, it noted that Solarvest Holdings Bhd
targeted to grow its recurring income assets to 30% of revenue in the coming years, while Samaiden Group Bhd aimed to derive 10% of its revenue from the recurring income segment by the financial year 2027 (FY27).
According to UOBKH Research, the decline in solar module prices is a boon, which could provide room for accelerated growth in the adoption of solar energy as well as potential margin expansion.
It said solar modules typically account for 30% to 60% of the construction cost of a solar project.
“Solar module prices have plunged significantly from the peak of US$0.28/watt in the third quarter of 2021 (3Q21) to US$0.11/watt currently.
“Moreover, solar module prices have plunged by a shocking above 90% from above US$1.00/watt back in 2010.”
According to the research house, the oversupply of solar modules in China’s solar power segment, which accounts for 80% of the world’s solar module supply chain, will continue to keep global solar module prices low in the near term.
China’s annual production capacity for finished solar modules was 861GW as at end-2023, more than double the global installations of 390 GW.
The capacity is expected to grow by 500GW to 600GW in 2024.
UOBKH Reseach’s sector pick is Pekat Group Bhd with a target price of RM1.09, pegged to 2025 price-earnings of 28 times.
The research house expected better performances across Pekat’s solar, earthing and lightning protection; and trading segments.
The company’s ongoing acquisition of EPE Switchgears would also bring about synergies, thus propelling its earnings momentum, according to the research house.
