Pekat Group has 3 synergistic business segments, which complement each other.

• Design, supply, and installation of solar photovoltaics (PV) systems and power plants;
  (Its associate company is a solar PV facility owner)
• Supply and installation of Earth and Lightning Protection (ELP) system; and
• Distribution of its own brands and third party brands of ELP products, Solar PV products, surge protection devices, aviation warning light systems.

Solar is and will continue to be the main growth driver, while ELP and Trading Divisions are reliant on the overall property and infrastructure development activities in Malaysia.

The Solar Division has been the key growth driver for its recent years, and is expected to continue to drive growth in coming years. These are mainly for Industrial and Commercial buildings in Malaysia. As of 3 May 2021, Pekat Group has designed, supplied, and installed 66MWp of solar PV systems and power plant since the commencement of operations in 2010.

The ELP Division and Trading Division have both slowed down in FYE 2019 and much more in FYE 2020, as these two divisions are tied to the slowdown in construction and property sector in Malaysia. Both divisions could pick up if the general construction and property sectors in the country picks up in the future. Some of its latest notable project include the Exchange 106 and Merdeka 118.

To find out how thick is Pekat Group, let’s look at this chart from the IPO prospectus in 3 key parts.

(1) Key shareholders’ interests are aligned with investors, and a management team with ample runway to grow.

The 3 key shareholders who are operating the business are just crossing into their 50’s, and have at least 2 more decades to grow Pekat Group into a larger company before passing over the baton. Chin Soo Mau, the Managing Director and co-founder, is 48 years young. Tai Yee Chee, the Executive Director overseeing the ELP and Trading division is 49 years young. Wee Chek Aik, the Executive Director overseeing the Solar division is also 49 years old young.

Another substantial investor, Hextar (Datuk Ong Soon Ho and Eddie Ong Choo Meng’s private vehicle) has previously bought a proportion of the above 3 persons’ stake for RM 50 million back in September 2020. Note that the value of the shares at IPO price of RM0.32 is valuing the stake at RM 40.5 million (19% discount to its original investment).

Key senior management personnel are subscribing to the IPO shares. Chew Teik Siang, the General Manager and Director of Pekat Solar, subscribed 2 million shares (0.3% stake). Wong Boon Kwang, the General Manager and Director of Pekat ELP, subscribed 1.4 million shares (0.2% stake). Oh Keng Jin, the CFO, also subscribed 1.4 million shares (0.2% stake).

(2) Leverage software to provide value-added products and services to customers.

Partnering with software development company Nexstream (who holds 30% stake in Pnexsoft), the company has developed a management system application that provides integrated control of solar PV facility’s balance of system that are related to power generation and storage including inverters, energy generation and bi-directional meters, generator set and energy storage system .

It is also developing a cloud-based solar PV monitoring system to monitor and analyse performance of on-grid and off-grid solar PV facilities. This includes real time measurement of DC power generated, AC output from inverters, power from solar PV systems or power plants, power exported to power grid, power imported from power grid, and management of energy storage system.

Future plans include a lightning risk assessment system to determine the level of lightning protection and a ELP monitoring system.

(3) Strategic partnerships provide constant stream to refill its order books in the future.

Pekat Group has 3 associates or joint ventures that have been generating order flows and is expected to continue to do so.

Pekat Energy (Sarawak) is established with an ex-employee to tap into Sarawak Alternative Rural Electrification Scheme (SARES). Since incorporation in September 2016, it has completed 4 projects with total installed power generating capacity of 506.0kWp and energy storage system capacity of 3,962.0kWh. It has 1 on-going project with installed capacity power generating of 188.0kWp and energy storage system capacity of 1,332.0kWh.

MFP Solar is partnership with Mega First Corporation Berhad to undertake solar investment based on a build, own, and operate model. In this JV arrangement, Pekat Group has the first right-of-refusal to carry out design, supply, and installation work. This associate has completed its first 20 years long PPA (power purchase agreement) project of 1.5MWp at VAT Manufacturing facility in Batu Kawan. Its next project is a 15 years long PPA for Proton’s manufacturing facility in Tanjung Malim with installed capacity of 12.1MWp.

Sunway Pekat Solar is a partnership with Sunway Construction Group Berhad to carry out design, supply, and installation work for Sunway group of companies’ properties. This include properties owned by Sunway and its related companies, as well as for projects where Sunway Construction is the main contractor for building and construction works.

(4) Huge growth expected by projecting 2021 financial performance based on secured order book as at 3 May 2021.

Considering the total revenue expected for the Solar and ELP division as per order book, Pekat Group has a total of RM 44.0 million billed and total of RM 117.2 million expected to be billed for FYE 2021. We are looking at a total expected revenue of RM 161.2 million.

Assuming the trading division generates an estimated revenue of RM 20 million (conservative estimate due to expected softer construction activities in 2021, as compared to historical revenue range of RM 24 million to RM 27 million), we are looking at a potential revenue of RM 181.2 million.

That is a revenue growth of 44.4% against FYE 2020 of RM 125.5 million. Revenue could be higher if more new contracts are secured and billed in 2021, and if Trading revenue is better than estimated here.

By applying a PAT margin of 10% (historical PAT margin ranges between 9.2% to 13.0%), we would expect FYE 2021 total PAT to be around RM 18.1 million. A 33% growth from RM 13.6 million in FYE 2020.

(5) Crazy high valuation awarded by the market to listed peers on Bursa Malaysia.

Pekat Group IPO valuation is at a huge discount to its peers listed on Bursa Malaysia. IF Pekat Group is to match Solarvest and Samaiden crazy high valuation, on FYE 2020 PAT of RM 13.6 million, it would indicate a share price range of RM 1.13 to RM1.25 (upside of 253% to 290%). The question of whether valuation can match depends on the growth profile of Pekat vs Solarvest and Samaiden, the relative size of the businesses, the relevant risks in the respective companies, and of course Malaysia retail investors’ appetite.

So the question after all this is “How Thick is Pekat Group?”
PEKAT IS A THICC PIKACHU.
Verdict: Share price will pop up on its first day of trading on 23 June 2021.
(Where could share price land after its first trading day? We map out a few ways to look at it.)

• IPO is oversubscribed by 76 times. Only a small 5% stake was being offered to the general public, remaining 21% to selected investors. Hence, the natural oversubscription when only RM 10.3 million is required to be raised from the general public. A total of RM 794.5 million subscription amount received. Bumiputra portion oversubscribed by 44 times, and remaining portion oversubscribed by 108 times.
• IPO price of RM 0.32 is below Hextar’s September 2020 investment cost, which is closer to RM 0.395.
• Confirmed order book provides clear view of growth in 2021 (minimum of 28% growth even if Trading division makes zero revenue for 2021).
• RHB Research ascribed the company at RM 0.56 fair value (upside of 75%) in its IPO note, based on a target 20x FYE 2022F PE.
• If we are to assume a conservative valuation at a Forward PE of 15x (IPO valuation multiple) on estimated earnings of RM 18.1 million, share price may conservatively sees RM 0.42 (upside of 31.25%).
• IPO price is at a huge discount to peers’ crazy high valuation, more than 70% discount. (Solar remains a hot theme on Bursa Malaysia). IF, IF, IF (Big IF and A Lot of IFs) Pekat were to match its peers valuation, it could go to the moon with 3x to 4x return from its IPO price, as high as RM1.25 (upside of 290%).

Here’s some other information you should know about Pekat Group.

Its market share and size as compared to competitors in Malaysia.

Historical Income Statement

• Boring flat revenue growth in FYE2018 to FYE2020.
• Construction-linked ELP division suffered decline.
• Margins were not consistent, up in certain years, down in certain years.
• The nature of being a project / contract driven business. Hence margins fluctuate as an outcome of projects won and delivered, a combination of cost fluctuation and pricing in response to competition.

Historical and Proforma Balance Sheet

• PPE increased in 2020 from purchase of Elmina land for RM 17.1 million.
• Proforma PPE to increase to RM 38.1 million with RM 18 million construction cost of new HQ (expected to move in by end of 2023), utilising IPO proceeds.
• Current rental paid to related parties (entity owned by 3 key shareholders) for existing HQ is RM 972k annually.
• Proforma cash balance is expected at RM28,693k.

• Proforma borrowings expected to reduce to RM 3,331k for non-current borrowings, by repaying RM 10 million from IPO proceeds.
• RM 0.2 million penalty expected for early repayment. RM 0.3 million annual interest expense savings expected from early repayment.
• Proforma gearing ratio expected to decline from 0.43x to 0.17x.
• Proforma net cash position of RM 20,126k.

Historical cash flow statement and Free Cash Flow

Cash flow from operations will be less than PAT, and is less predictable, due to structural business model of the industry, which results in cash trapped in the form of tender bond, performance bond, and retention sum. As such, Free Cash Flow generation is also expected to be less predictable that revenue and profit.

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