RHB Investment Bank Bhd (RHB Research) has maintained its BUY call on Coastal Contracts Bhd with a target price of RM1.67, reflecting a 10% upside, following the company's announcement of its maiden foray into the renewable energy (RE) sector through a solar project in Sabah.
The research house highlighted that the strategic move into green energy aligns with the sector's promising growth outlook, underpinned by initiatives like the Corporate Renewable Energy Supply scheme and Malaysia's National Energy Transition Roadmap.
Coastal Contracts, through its subsidiaries Coastal Solar and Pleasant Engineering Sdn Bhd and in collaboration with consortium partner Bina HT, secured a notification of offer acceptance from the Energy Commission of Sabah. The consortium will develop a 15MWac large-scale solar (LSS) photovoltaic plant on Sabah's east coast.
With a 95% effective stake, the company expects the plant's commercial operation date to be between Apr 1, 2027, and June 30, 2027, under a 25-year power purchase agreement (PPA) with Sabah Electricity.
While the terms of the PPA are yet to be finalised, Coastal Contracts' management estimates an internal rate of return of 10%-12%, partly due to potentially higher tariffs in Sabah.
Historically, the region has offered favourable rates under the LSS2 programme. The estimated capital expenditure for the project is between RM45 million and RM56 million, based on an expected cost of RM2-RM2.5 million per MWdc. Funding is anticipated to follow an 80:20 debt-to-equity ratio, potentially generating RM2-RM3 million in annual earnings upon completion.
RHB Research views the project positively, citing the company's diversification into green energy as a prudent move to mitigate risks associated with its heavy reliance on Petroleos Mexicanos for income. The venture also underscores Coastal Contracts' strategic approach to capitalising on emerging renewable energy opportunities, supported by its strong financial position and expertise developed through a dedicated renewable energy team.
Despite the optimistic outlook, the research house flagged potential risks, including project delays, contract cancellations and rising costs. However, they emphasised the long-term visibility the >15-year PPAs provided and the robust growth trajectory of Malaysia's renewable energy (RE) sector as supporting factors for Coastal Contracts' ongoing transition.
The research house retained its earnings estimates for the company, noting that contributions from the solar project are expected only from 2027.
