Key player for the electrical distribution industry

• Powerwell’s track record as well as the strong business relationship with Siemens and Schneider could position them in a decent spot for the infra works and several upcoming projects in Malaysia; current orderbook stood at RM67m.

• We project the earnings to grow by 12-42% to RM10.1-11.3m in FY21-22f (after a declining 22.2% to RM7.1m in FY20) underpinned by recovery in construction outlook in CY21-22 and better margins following the machinery and ERP upgrades.

• Powerwell could justify by pegging its FY21f core EPS to 20x PE (~22% discount from 5Y average Industrial Products PE of 25.6x), leading to a FV of RM0.35.

Company background

• Established in 2001, Powerwell is involved in the design, manufacture and trading of low voltage (LV) and Medium Voltage (MV) electricity distribution products such as switchboards, switchgears and other products. These products are resupplied to main contractors, mechanical and electrical contractors, and EPCC companies for residential, commercial and industrial buildings, social amenities and infrastructure developments across various sectors.

Key highlights

• More than 25 years’ of experience with global presence. Powerwell has supplied its products and services to various projects in Malaysia, including MRT (Sg Buloh Kajang), government and private projects as well as having presence in the global arena including Vietnam, Bangladesh and Indonesia.

• Strong business relationship with Siemens and Schneider. Besides manufacturing its own brand “Powerwell”, it does third party brand manufacturing for Siemens (LV switchboards and MV switch gears), a leading supplier of systems for power generation and transmission, and Schneider Malaysia (LV switchboards), the Malaysian arm to French conglomerate Schneider Electric that specializes in electrical equipment.

• Decent orderbook for 1-2 years and healthy balance sheet. As at end-Apr 2020, their orderbook stood at RM67m, with a tenderbook of c.RM250m. Meanwhile, Powerwell’s net cash per share stood at 5.4 sen (c.17% of share price).

• Transfer to Main Market is the next catalyst. We believe Powerwell’s earnings over the years have surpassed the threshold for main market listing requirement and this is likely to be a catalyst moving forward.

Financials

• The group recorded revenue of RM88.1m in FY19 vs. RM105.4m in FY18 mainly due to the lower project sales from the Bangladesh, Indonesian and Vietnam operations

amid political uncertainty and economic slowdown in the countries respectively. Meanwhile, its core PATAMI declined 28.4% to RM9.1m in FY19 due to overall decline in lower average project value for LV products.

• For FY20, we expect the earnings to decline to RM7.1m due to the Covid-19 pandemic effect before recovering to RM10.1m and 11.3m in FY21-22f, respectively banking on higher product demand amid recovering construction outlook into 2021- 22 as well as better margins following the machinery and ERP upgrade.

Valuation

• Based on the current price of RM0.29, Powerwell is priced at FY21-22f of 16.7x and 14.9x, respectively. We opine that Powerwell’s valuation can be justified based on FY21f core EPS of 1.74 sen pegged to a PE multiple of 20x (which is a discount c.22% from 5Y average PE of KL Industrial Products index at 25.6x), leading to a fair value of RM0.35.

Potential risks

• Slower-than-expected construction projects being awarded. Powerwell’s revenue is highly correlated with the construction sector. Hence, should any economic downturn or political uncertainty would contribute to slower infrastructure development, translating to softer demand for electrical works.

• Forex fluctuation risks. Purchases of the components from overseas suppliers will be denominated in USD and VND, while part of its revenue was denominated in the USD (FY16-18: 16.7-31%).

Source: Mplus Research - 16 Jun 2020