CYPARK Resources Berhad Fair value: RM1.35 (22%) Profiting From Waste

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1 ta securities holdings berhad(14948-m) A member of the ta group NEW LISTING Tuesday, October 05, 2010 Sector: MERA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: CYPARK Resources Berhad Fair value: RM1.35 (22%) Profiting From Waste THIS REPORT IS STRICTLY FOR INTERL CIRCULATION ONLY* Main Market SUBSCRIBE Tan Kam Meng, CFA ext:1614 kmtan@ta.com.my Company Background CYPARK Resources Bhd (Cypark), established in 2004, is primarily an environmental technology and engineering specialist and integrated landscape services expert. The company provides solid waste management or sanitary landfills to both the private and public sectors, which include transforming neglected, degraded or contaminated land into sustainable, beautiful and manageable fields for a better and safer living environment. For 5MFY10, Cypark derived the bulk of its revenue from the provision of environmental management services (94%), followed by the provision and maintenance of landscaping services (6%). Sanitary landfills are landfills that ensure disposal activities do not create health or safety hazards to public health or the environment. In sanitary landfills, solid waters are confined to the smallest practical area, reduced to the smallest practical volume and then covered with a layer of earth. As at 30 September 2009, there are 176 solid waste disposal landfill sites in Malaysia that are still in operation. Of these, only 10 are of sanitary standards. Some of the completed major projects include the restoration of a disused mining land in Cyberpark, Cyberjaya and restoration of the Taman Beringin Safe Landfill restoration project in Kuala Lumpur. For integrated landscape services projects, the company has completed the Putrajaya Waterfront Core Island, the Cyber Park in Cyberjaya, Taman Metropolitan Kepong, the maintenance of recreational fields and children s playgrounds in Kuala Lumpur as we as the landscaping of a 3 star Tanjung Rhu Resort Hotel in Langkawi. On the overseas front, the company has completed landscaping works of the AV project in Doha, Palm Jumeirah Marina Apartments and Burj Dubai Business Park II in Dubai. Share Information Enlarged Share Capital (mn) 145 Market RM0.50 (mn) 72.5 Par Value 0.5 Issue Price 1.1 Oversubscription rate Estimated free float (%) Tentative Listing Date Tentative Listing Dates Event Opening of the IPO Closing of the IPO Balloting of Applications Allotment of Shares Listing Tentative Date 28 Sep Oct Oct Oct Oct 10 Ratio & Analysis NTA per share (post IPO)(sen) 0.51 Price to NTA (x) 2.2 Proforma ROE (%) 27.8 Proforma ROA (%) 7.1 Proforma Net Gearing (x) 1.0 Proforma Current Ratio (x) 1.33 Utilisation of Proceeds RMmn % Repayment of debt Working capital Expansion of business Exiting & future operati Listing exp IPO The IPO involves the issuance of 30mn shares at RM1.10/share, in which 7.25mn to be allocated to Malaysian Public, 3mn to eligible directors, employees and business associates, 19.75mn to identified investors. There will be an offer for sales of 28mn shares at RM1.10 to selected investors by way of private placement. Based on RM1.10, Cypark s market capitalization will be RM159.5mn. Page 1 of 5

2 The gross proceeds of RM33mn raised would be utilized in the following manner: Repayment of overdraft facility obtained for the purpose of the National Landfill restoration project Timeframe Estimated Within 12 months 10.0 Working capital Expansion of business Within 18 months 2.0 Existing and future Within 12 months 18.6 operations Est. listing expenses Within 2 months 2.4 Total 33.0 Major shareholders Post IPO, Tan Sri Razali, a major shareholder of Cypark, will have a stake of 32.5% in the company. Tan Sri is the non independent non executive chairman who is responsible for the formulation and execution of the overall business strategies of Cypark. He served in various capacities in the world body and was actively involved in several bodies especially those dealing with development, the environment, human rights and reform of the United nation. Investment case Strong market positioning and high entry barriers Vast business opportunities; Strong earnings visibility Strong market positioning and high entry barriers Cypark secured the National Landfill Restoration project, covering 16 landfill sites situated in Perlis, Pahang, Negeri Sembilan, Johor and Terengganu. The high profile project is expected to provide a strong position for the group to secure new orders. The level of competition is moderately low given the high barrier of entry in Malaysia. Note that the provision of environment solution services is a niche industry and operators are required to obtain license from relevant government licensing authority such as PKK, Ministry of Finance, Petronas and CIDB. Vast business opportunities The findings of 136 solid waste disposal landfill sites in Malaysia are classified as non sanitary present enormous opportunities to Cypark to remediate the sites. Moreover, the increasing population and greater compliance to regulations for effective solid waste management would ensure future earnings growth. Page 2 of 5

3 Under the 10MP, the Prime Minister of Malaysia said that existing 112 unsanitary landfills to be closed and rehabilitated, some to be upgraded to sanitary landfills. Besides, the Housing and Local Government Minister Datuk Chor Chee Heung said 9 new sanitary landfills would be fully operational by 2012 to process 17,000 tonnes of garbage a day in the country. These both create huge sustainable opportunities to the group. For landscaping services, we believe the change in consumer preference toward mid to high end development would provide sustainable business to Cypark. According to PIC, the demand for high end housing, which usually equipped with unique and creative landscaping, is on the rise. For 1H10, the number of transaction involving properties that priced at more than RM500,000 surged by more than 230% YoY. Meanwhile, the launch of properties that priced at more than RM500,000 grew by 50% YoY. This bodes well for Cypark to refill its order book. Strong Earnings Visibility Cypark has an outstanding order book of RM293.8mn which is sufficient to keep the company busy for the next 1.5 years. Note that the bulk of the outstanding works come from the 16 National Landfill Restoration project, which is owned by Kementerian Perumahan dan Kerajaan Tempatan (KPKT). As such, we are relatively certain with payments for works and understand that this project commands a gross profit margin of 30%. Project 16 National Landfill Restoration Site Services Putrajaya Dev Phase 2 Construction remaining infrastructure R11C Project value Outstanding order book Client KPKT Putrajaya Holdings Putrajaya Holdings Total outstanding order book Source: Cypark (THE REMAINDER OF THIS PAGE IS INTENTIOLLY LEFT BLANK) Page 3 of 5

4 Cypark is also aggressively seeking new projects to replenish its order book. The company has tendered up to 1.7bn worth of projects as below Tender title Energy efficient waste management systems for Brunei Darulsalam Hardscaping works at Istana Negara, KL Taman Beringin Transfer Station, KL Pembangunan Taman Botani Shah Alam Proposed construction and completion of roadworks, drainage and utilities at Precincts 7 & 8, Putrajaya Design and build Taman Beringin Transfer Station Leachate treatment plant, KL Proposed integrated solid waste management facility for Kedah, Terengganu, Pahang, Johor & Negeri Sembilan (PFI) The waste management project in Timor Leste Proposed safe landfill closure and remediation in Kedah and Perak Operation & maintenance for 16 landfills currently being restored by Cypark Total est. value Source: Cypark Client The Brunei Economic Development Board Maya Maju Sdn Bhd DBKL MARDI Putrajaya Holdings Jabatan Pengurusan Sisa Pepejal Nagara Ministry of State Administration and Territorial Management, Timor Leste RM1725mm Forecast For 5MFY10, Cypark has recorded a net profit of RM8.6mn, which represents a growth of 87%. In fact, Cypark s 5M profit has already accounted for more than 90% of its FY09 profit. Note that the strong growth in profit was supported by the topline growth of 87% over the period. We project Cypark to record RM21 23mn net profit for FY10 11, based on its current outstanding works of RM294mn. Cypark s net gearing as at March 10 was considerably high at 1.0x after utilising part of the listing proceeds in pairing down debts. However, we are not unduly concerned as we are convinced by the certainty of cash flow as the company does most of the government projects. Valuation Given the relatively short operating track record and the low market cap, we think Cypark should be valued at a steep discount to our sector PER for the construction and property sector. Currently, our sector PER for low to mid cap construction and property stocks under are 12x. We value Cypark at 8.5x FY11 EPS, representing a 30% discount to our sector PE, and derive a target price of RM1.35. Given the upside potential of 22%, we recommend investors to subscribe to Cypark s IPO. Page 4 of 5

5 FYE Oct F 2011F Revenue EBITDA PBT Tax (2.46) (6.39) (3.40) (8.24) (8.5) Net Profit EPS^ (sen) PER (X) DPS (sen) # 2.20 Dividend Yield (%) Gross Margin (%) EBITDA Margin (%) PBT Margin (%) Net Margin (%) Tax Rate (%) ^ Based on enlanged outstanding share of 145mn # Dividend policy no less than 10% PAT (THE REMAINDER OF THIS PAGE IS INTENTIOLLY LEFT BLANK) Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 5 of 5