Pestech set to benefit from construction of new power plants

by **Cals** Tue 25 Feb 2014, 01:33

Business & Markets 2014

Written by Kenanga Research

Monday, 24 February 2014 10:12

Pestech International Bhd
(Feb 21, RM3.69)
Initiate coverage with an outperform rating and target price of RM4.25.Since our initial recommendation on this stock 12 months ago, the share price has rallied more than twofold from RM1.18 in February last year. The strong share price performance is backed by an earnings growth story coupled with a compelling valuation level. Since our foray, Pestech has secured a total of RM331.5 million worth of contracts.

Despite the impressive share price performance, we believe it is still not too late to accumulate this under-researched niche player in the energy infrastructure industry.

Pestech is a triple-play for the following attributes: (i) explosive earnings growth; (ii) alternative power play besides the integrated utility company and independent power producers (IPPs); and (iii) proxy to the fast-growing Asean economy.

We are extending coverage of this stock to core coverage for institutional clients. We are initiating coverage on Pestech with an “outperfom” rating and target price of RM4.25 per share.

It should benefit from the ongoing construction of new power plants in Peninsular Malaysia, like the 2,000mw coal-fired Track 3B power plant, and other mega infrastructure projects in the country.

A 1,200mw power plant is being proposed for the refinery and petrochemical integrated development project in Pengerang, Johor with about RM250 million worth of grid interconnection facility contracts up for grabs. The Sarawak corridor of renewable energy, meanwhile, plans to generate about 28,000mw of power by 2030. This positions Pestech as an alternative play for the still booming power sector besides Tenaga Nasional Bhd and the IPPs.
Out of the five countries with fast growing energy infrastructure development in the Asean region, Pestech has already landed in Cambodia and Laos and is currently working to make inroads into Myanmar and the Philippines. Potential in these four countries is huge as 22% to 66% of the population there still do not have access to electricity. The average annual investment in transmission and distribution networks in Asean is about US$19 billion (RM62.7 billion) per annum over 2013 to 2020 and would reach US$32 billion per year from 2031 to 2035.

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From a low base of RM16.6 million net profit in FY12, Pestech is set to grow its bottom line tremendously over the next two to three years by a 57% three-year compound annual growth rate given its sizeable order book of about RM400 million with potential new orders coming from Indochina.

From financial year 2016 ending Dec 31 onwards, Pestech should see better earnings contribution from its product segment upon commencement of its manufacturing facility. Its profit margin is likely to improve given that the product segment fetches better operating margin of about 20% versus about 18% at the project segment. — Kenanga Research, Feb 20

This article first appeared in The Edge Financial Daily, on February 24, 2014.