O&G firm Reservoir Link dives into solar
23 Jun 2021
Just about one year after its listing on Bursa Malaysia, oil and gas (O&G) well services group Reservoir Link Energy Bhd is making inroads into the fast-growing, highly competitive solar energy market.
It may not be the first local-listed O&G services group to do so. But Reservoir Link executive director Thien Chiet Chai is rather upbeat about the partnership with Solar Bina Engineering Sdn Bhd, which is one of the industry leaders with more than a decade of experience in the segment.
“Renewables are something we’ve been wanting to do,” said Thien. “We [Reservoir Link] actually bid for LSS4 (Large Scale Solar) but unfortunately it was not successful, so when the opportunity came to venture into the space with [Solar Bina founder] Eric Lee, we took it without hesitation,” said Thien.
Under a deal worth RM21.17 million, Reservoir Link will acquire 51% in special purpose vehicle Founder Energy Sdn Bhd from Solar Bina’s Lee, which will house identified assets, equipment and manpower that are transferred from Solar Bina.
In a nutshell, Solar Bina undertakes construction of solar PV projects across Peninsular Malaysia, and has participated in projects from all LSS bidding rounds in the country. It is also a supplier of related equipment including solar mounting systems and AC/DC inverters.
It has the construction totalling 655MW in solar generation capacity under its belt, of which 355MW or 54% has been installed, with the other 300MW still under development.
It is also negotiating 215MW worth of projects under the latest LSS4 bidding round quota that was announced by the government on March 12, 2021.
Aside from the sizeable order and tender books, Reservoir Link’s confidence towards its prospects arises from the strong long-term relationship Solar Bina has with its clients — including a handful of the listed names in the solar business.
“We are confident about Solar Bina’s track record,” said Thien. “With a market share of about 20%, 30% in this space, that represents about RM500 million to RM600 million worth of projects in LSS4 alone.”
Lee will also sign an executive agreement to lead Reservoir Link’s solar division for the next five years.
This is coupled with the profit guarantee totalling RM13.836 million in the two years upon the completion of the acquisition — which makes up to an average of RM3.53 million per year for Reservoir Link’s 51% equity portion in Founder Energy.
Comparatively, the annualised guarantee sizes up to 30% to Reservoir Link’s net profit of RM11.76 million in financial year 2020 (FY20).
While the acquisition will be part-funded via the issuance of 18.15 million new Reservoir Link shares to Lee at 70 sen apiece, the profit guarantee — all else equal — ensures growth in Reservoir Link’s earnings per share, instead of a dilution.
It should be noted that Solar Bina is not yet a solar plant owner, although the management has made clear it is in the pipeline.
In the meantime, Founder Energy will also utilise Reservoir Link’s existing connections from past projects to tap into the fast-growing markets across ASEAN.
“The industry is growing very fast, and Reservoir Link will provide the support needed to tender for bigger projects in a bigger market,” Lee said.
Lee also commented that margins have been manageable amid the competitive market. From a cost perspective, prices have been trending up for solar panels, which clients sometimes procure separately.
“While the EPCC market is quite competitive, the size of the pie is huge — we are talking about more than 1,000MW DC capacity available. And there are not many players of a size that is capable of undertaking large-scale projects,” said Lee.
Well services prospects still intact
On Reservoir Link’s core business, Thien said the group is rather comfortable in terms of contract replenishments, as the group have been seeing contract renewals from existing clients.
For FY20 ended Dec 31, 2020, Reservoir Link booked a net profit of RM11.76 million on revenue of RM87.53 million, up 21.5% and 9.4%, respectively, from FY19 levels — when it was yet to be listed. This was partly thanks to lumpy payments from works in Mauritania for client Petronas Carigali.
“In Mauritania, the pace of their well-abandonment activities has been picking up,” said Thien. The group’s order book is now at an estimated RM150 million, which could last the group for another two years, he added.
Shares of Reservoir Link settled at 52.5 sen on Tuesday, valuing the group at RM150 million. The counter has gained 11.5 sen from its initial public offering price of 41 sen. The stock was listed on July 15, 2020.
Source: The Edge Markets