Short Position, Permaju opts for solar

  • Corporate News
  • Saturday, 07 Sep 2019

The returns generated by the Employees Provident Fund (EPF) is something most Malaysians will watch out for. At a steady return at around 6% a year, a rate that has been seen in recent years, the performance of the largest pension fund in Malaysia has turned over time around the minds of detractors

Permaju opts for solar

THERE used to be a distinct difference between renewable energy (RE) and electricity generated by the conventional gas and coal power plants. RE such as solar gets much better rates from Tenaga Nasional Bhd compared to electricity generated by the conventional power plants.

However, of late, the rates for electricity generated by large-scale solar (LSS) power plants are lower compared to the conventional power plants.

The average rate from the 113 bidders vying for 500MW of LSS plants up for grabs was about 25 sen per unit, with the lowest coming in at 17.7 sen per unit. The large number of companies bidding to put up LSS plants even though the rates are lower suggest that the business is lucrative.

However, is this really the case?

The jury is still out if LSS plants at low rates of about 25 sen per unit would be profitable. The risk to run the solar plant over a 21-year period is high and the industry is new in Malaysia and does not have a long enough track record to prove otherwise.

That is the reason why banks are only willing to provide financing of up to 70% for LSS power plants, compared to 95% for conventional coal and gas power plants.

Amidst such an environment for solar energy, Permaju Industries Bhd is planning to put up an LSS plant to generate 90MW on a piece of land in the district of Seremban, Negri Sembilan.

Based on industry estimates, a 90MW plant would require about 350 acres. There are other costs involved as well. Also, operating and maintaining a solar power plant is not easy. With a low or almost no land cost, the plant may be profitable at low rates.

However, this means tying up the land for 21 years without considering any development potential. Is there such a piece of land in the district of Seremban that is so far from the population centre that it has no development potential for the next 20 years?

Out of the box

COMPANIES have to constantly think out of the box to find new ways of increasing earnings, especially in challenging economic times. But some ideas can seem to be a bit too far out of the box. Take the case of the announcements made this week by PRICEWORTH INTERNATIONAL BHD (PWI) and Heng Huat Resources Group Bhd.

In the case of PWI - which slipped into the red for the financial year ended June 30,2019 due to interruptions in its logging operations - the company on Tuesday announced that it was working towards a deal that would allow it to pay for a constant supply of logs in new shares.

The deal with Innoprise Corp Bhd, an investment holding vehicle of Yayasan Sabah, would see new shares, amounting to a 30% stake in PWI, being issued at five sen per share.

The deal raises eyebrows, as it is something the market has not seen before. Why pay in shares instead of cash?

While paying in equities would allow PWI to stretch its budget, as a general rule, it is always cheaper and easier in the long run to pay cash.

What’s more, the structure of the proposed deal with Innoprise points to earnings dilution for PWI’s shareholders in the future.

Nevertheless, Innoprise, which will likely emerge as the single-largest shareholder in PWI upon execution of the deal, has several timber concessions and controls a significant supply of timber logs. This may be positive for PWI when it becomes an associate company of Innoprise.

In Heng Huat’s case, the company on Thursday claimed that it had emerged as the country’s leader in coconut fibre production after merely forking out RM200,000 for a 97% stake in a manufacturing plant in Terengganu.

Heng Huat projected that it would control 80% of the market share in the Malaysian coconut fibre sector post-acquisition of the plant that comes with a monthly production capacity of 150 tonnes and 240 tonnes of coconut fibre and coco peat, respectively.

Herein lies the question: if it could be that cheap for a company to become a market leader in an industry, then it could mean the entry barrier to the business is not very high. And if that were the case, it will also likely mean the business is not a very lucrative one; and even if the company could command the biggest market share, its leading position will easily be taken over by others.

Keeping the faith

The returns generated by the Employees Provident Fund (EPF) is something most Malaysians will watch out for.

At a steady return at around 6% a year, a rate that has been seen in recent years, the performance of the largest pension fund in Malaysia has turned over time around the minds of detractors.

More so when stocks on Bursa Malaysia have not been performing over the past few years, where at one time it was labelled Asia’s worst performing market, the performance of the EPF has been a minor miracle that such a large fund has bettered the stock market and most balanced funds in the private side.

It reported total investment income of RM12.32bil for the second quarter ended June 30,2019 (Q2 2019), RM70mil less than the RM12.39bil recorded in the corresponding quarter of last year.But the fund did says that although market conditions in Malaysia remain challenging over the short term, it provides the EPF with good buying opportunities.

But one warning: Heading into the end of the year, it believes it will be very difficult to maintain the first half momentum as worrying trends are emerging in many global indicators.

The other takeaway from the numbers is that more people are trusting the EPF with their money.

Accumulated withdrawals for Q2 2019 was RM23.8bil, which was RM2bil lower than RM25.8bil of withdrawal seen in the previous corresponding quarter.

That is despite contributions received was almost more RM2bil at RM39.2bil in Q2 2019 from the previous same period.

That could be an indicator that people are trusting the EPF with their retirement funds instead of thinking they can outperform a fund that has delivered stellar returns over the past few years.

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