KUALA LUMPUR: Coastal Contracts Bhd's entry into the renewable energy (RE) sector is timely as it aligns well with the industry's growth trajectory, supported by robust initiatives introduced by the government, RHB Research said.
Its subsidiaries Coastal Solar and Pleasant Engineering, together with Bina HT as part of a consortium, have secured a letter of notification on acceptance of offer from the Energy Commission of Sabah.
The solar power purchase agreement with Sabah Electricity will span 25 years, with the commercial operation date scheduled between April 1, 2027 and June 30, 2027.
RHB Research is optimistic about Coastal Contracts' announcement of its maiden solar project, marking its entry into the renewable energy (RE) sector and diversifying its revenue stream.
"This 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," it said in a note.
While details of the PPA are yet to be finalised, RHB Research said management estimates the project's internal rate of return to be around 10-12 per cent.
It added that the higher IRR could be attributed to potentially better tariffs, as Sabah historically offered higher rates under the Large Scale Solar 2 (LSS2).
"The general solar capex requirement is around RM2-2.5m/MWdc, translating to a total investment of about RM45 million-RM56 million for the 15MWac plant and funding is expected to be structured with an 80:20 debt-to-equity ratio.
"Based on these parameters, we estimate the project to generate earnings of RM2 million-RM3 million per annum," it said.
RHB Research maintained its earnings estimates as contributions from the project are only expected from 2027.
"We view this positively as Coastal Contracts ventures into green energy while diversifying its income stream, which is in line with its stated strategy. Keep Buy and RM1.67 target price, 10 per cent upside," it said.