Cypark’s latest quarterly accounts raise questions

This article first appeared in The Edge Malaysia Weekly on April 15, 2024 – April 21, 2024

CYPARK Resources Bhd’s share price has made a leap over the past two weeks, bouncing back from a low of 81 sen to 97.5 sen apiece last Tuesday — the highest level in slightly over four months.

The climb may have left some quarters puzzled considering the company bled red ink in the third financial quarter ended Jan 31, 2024 (3QFY2024).

The renewable energy producer incurred a quarterly net loss of RM27.89 million as a result of a sharp rise in amortisation amounting to RM21 million, compared with RM6.1 million in the preceding two quarters. There is no year-on-year comparison as Cypark changed its financial year in 2023 to April 30 from Oct 30.

The amortisation is related to its waste-to-energy (WTE) plant in Ladang Tanah Merah, Negeri Sembilan. The WTE system is categorised as an intangible asset.

The increase in amortisation is due to a policy revision by the new audit committee, which appears to disagree with the extension of the WTE plant’s useful life.

Cypark’s latest quarterly accounts raise questions

“In [the] current financial quarter (3QFY2024), the Audit & Risk Committee comprising majority new members reviewed the amortisation policy and has decided to take a more prudent step by reverting back to the FPE2023 amortisation period by amortising [the] WTE plant according to the concession period as per the agreement with the government,” says Cypark in its reply to The Edge’s queries on the amortisation and extension of the WTE plant’s useful life.

The company merged its audit and risk management committees effective Jan 18. The audit and risk management committee currently consists of chairman Datuk Mohd Zainal Shaari, and Mohd Adzahar and Norita Ja’afar.

Cypark explains that the RM21 million amortisation for the quarter is the result of an additional amortisation amount due to under-recognition in the preceding two financial quarters, and the current quarter’s adjustment following the change in the useful life of the WTE plant back to the concession term, which is 19 years remaining, from 40 years in the earlier revision.

Including the RM21 million in 3QFY2024, this brings the total amortisation to RM33.2 million for the cumulative nine-month period ended Jan 31. The amount is equivalent to 26% of the company’s cumulative revenue of RM127.68 million.

Moving forward, Cypark’s amortisation is expected to be roughly RM11 million a quarter, or RM44.2 million annually, based on the cumulative figure as at end-January.

Cypark had net assets of RM1.263 billion, excluding loans and borrowings of RM1.3 billion, on its balance sheet as at Jan 31. Intangible assets of RM929.09 million formed the bulk of the net assets (see table).

The renewable energy producer first made known the extension of the useful life of the WTE plant to 40 years in 1QFY2024.

The group explained in its filings with Bursa Malaysia at the time that the extension of the useful life for its intangible asset came following a technical assessment on the lifespan of the WTE plant at the start of FY2024. Its rationale was that the operational life of the plant could be extended beyond the design lifetime with refurbishment considerations and good standards of operations and maintenance.

The plant only began operating on Dec 14, 2022. In other words, the extension of the useful life of the plant came five months after it commenced operations.

An extension of the useful life of an asset shortly after it has begun operations is rather unusual, according to accountants. Furthermore, a longer useful life needs to be justified by a fresh concession agreement or a renewal of the existing contract, ensuring the asset can continue generating earnings.

“The useful life of a concession asset usually follows what has been laid out in the original concession agreement.

“There are instances where concession assets’ useful life can be extended, usually when the company is confident that the asset can continue to be in operations beyond the initial useful life. That can happen in the form of an extension of the concession agreement, or if the company has found a third-party buyer for the assets in question,” an accountant tells The Edge.

Revised tipping fee not approved yet

The renewable energy segment is Cypark’s key revenue contributor for 3QFY2024, with revenue derived from brownfield projects and large scale solar (LSS) construction contribution.  Its LSS projects have yet to see the inflow of earnings .

The company has secured a few LSS projects. It was awarded the LSS2 floating solar project in Danau Tok Uban, Kelantan, and the LSS3 ground mounted solar project in Merchang, Terengganu. The projects’ completion dates have been delayed, with the Covid-19 pandemic partly to blame, but the group says it is set for commission in the current quarter.

Besides, Cypark has a 25-year concession agreement with the Ministry of Housing and Local Government to build, operate and manage the WTE plant. The agreement expires in end-2041.

Under the agreement, the government will deliver municipal waste to Cypark’s WTE plant for treatment and disposal. In return, it earns a tipping fee.

In addition, the company is expected to generate electricity with the waste collected under an agreement with the Sustainable Energy Development Authority Malaysia.

However, the company’s WTE segment, which derives revenue from the sale of green energy, tipping fees and recycling revenue, has been in the red since it started operations in December 2022. This is because revenue from the sale of green energy has come in lower than anticipated, raising questions about the commercial viability of the WTE project.

The segment made a loss before tax of RM36.7 million against revenue of RM14 million in 3QFY2024.

In the nine-month financial period ended Jan 31, 2024 (9MFY2024), Cypark attributed the lower-than-anticipated sale of green energy to initial operations, outages and the rainy season, which increased the moisture level of the waste and hindered maximum capacity generation, among other reasons.

Cypark has not provided the breakdown of the WTE segment’s revenue contribution from tipping fees and recycling revenue, which is the sale of green energy generated.

When asked about the tipping fees it receives, the group said the current fees are “lower than the market rates for a single landfill operation”.

It is interesting to note that the tipping fees Cypark recognises as part of its revenue for the WTE segment is based on the  adjusted rate that has been agreed upon in the concession agreement, but which has yet to be approved by the authorities at this juncture.

The group rationalised that under the concession agreement, it is entitled to a revised tipping fee on the date the WTE plant is completed and in full operation.

“Therefore, the company recognised the adjustment in accordance with the said agreement,” says Cypark in its reply when asked to justify the tipping fee based on the revised rate.

It also points out that the approval for the revised tipping fee is expected to be given in the current quarter.

“If the revised tipping fee is not agreed, we will reverse the accrued revenue from the Statement of Comprehensive Income,” says Cypark.

Receivables impairment and high gearing

Companies’ receivables are a crucial indicator of financial health.

In 3QFY2024, Cypark made a RM5.5 million impairment on trade receivables, of which RM4 million was related to the WTE segment while the remaining RM1.5 million was related to the renewable energy segment.

Its renewable energy segment consists of the operations and maintenance of solar projects.

When asked the cause of the impairment of the trade receivables, Cypark did not reveal much, besides noting that the RM4 million is impairment on trade receivables related to construction while the RM1.5 million is from operation and maintenance services.

The company kept mum on who the debtors are, when asked in the email.

It is worth noting that Cypark raised RM264.2 million in fresh funds through the issue of perpetual sukuk via its wholly-owned subsidiary Cypark Renewable Energy Sdn Bhd. Consequently, the company’s total perpetual sukuk ballooned to RM502.8 million as at Jan 31.

For 9MFY2024, Cypark paid RM17.96 million as distribution to its perpetual sukuk holders. The amount is roughly 14% of its cumulative revenue of RM127.68 million.

On top of that, it incurred finance costs of RM26.22 million for the first nine months of FY2024.

Boardroom changes

At the start of 2024, Cypark underwent a round of board changes, which saw Datuk Mohammad Zainal Shaari and Norita Ja’afar becoming independent non-executive directors.

Datuk Hamidah Moris was redesignated as executive chairman from non-executive chairman previously. Jakel Capital Sdn Bhd director Muhammad Ashraf Muhammad Amir was redesignated as executive director from non-executive director.

The boardroom changes came after the retirement of its group CEO Datuk Daud Ahmad last October, as well as the resignation of independent director Datuk Megat Abdul Munir Megat Abdullah Rafaie.

In addition, two independent directors Datuk Hasnul Mohamad Salleh and ­Norsimah Noordin stepped down in November.

Jakel is the single largest shareholder of Cypark, with a 21.5% stake, followed by co-founder Daud with 8.366% equity interest. Interestingly, Daud bumped up his shareholding after his retirement by exercising his options under the employees’ share option scheme, at an exercise price of 38 sen per share.

On March 29, Cypark announced that selected senior management, including the group CEO, had been told “to be on unrecorded leave in order to facilitate a fully independent and transparent review process”.

The company said Hamidah and Muhammad Ashraf would assume the senior leadership responsibilities in the interim, and the continuity of projects and business operations during this period would remain as usual.

According to the filing with Bursa Malaysia in February, the review covers all its current and potential future business segments, including renewable energy, construction and engineering, waste management and waste-to-energy, as well as green technology and environmental services.

The review process seeks to evaluate the current operational frameworks of the group and its competencies, with a view to further cultivate its strategic partnerships, embrace a holistic approach to environmental, social and governance practices, and elevate its competitiveness in order for the group to achieve sustainable business growth both locally and regionally.

Cypark bit the bullet a year ago. It booked an impairment of RM376.5 million for the financial quarter ended April 30, 2023.  Cypark told the investing public then that the impairment was a one-off expense after its auditors, Nexia SSY PLT, conducted a review of the company’s assets. The write-downs included provisions for liquidated ascertained damages due to delays in existing projects.

Will last year’s sizeable impairment  recur? The current review will probably provide the answer to that.

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