Wah Seong (BUY, Target Price: RM 2.02)'s indirect subsidiary P.M.T.I Energy (Cambodia) Co., Ltd. (PMTIEC), on 5 December 2014, entered into a Power Purchase Agreement (PPA) with Baitang (Kumpuchea) Plc. (Baitang), a public limited liability company of the Kingd om of Cambodia. PMTIEC through the PPA will sell up to 3.5MW/hr of any and all electric energy generated available for sale to Baitang for 20 years. The PPA is effective from the first day following the date which PMTIEC completes the Initial Capacity Test, and may be renewed and extended perpetually by mutual agreement between PMTIEC and Baitang. This venture is line with Wah Seong's strategy of developing its portfolio of renewable energy/power plants in the region.

Energy generated refers to the Biomass Power Plant project which PMTIEC had invested in and which will take about 1.5 years to construct from September 2014, of a 10MW power/hr rice husk power plant in Battambang City . The project will allow PMTIEC to benefit from Cambodia's abundant supply of rice husk waste as a reliable source of energy for electricity power generation, while generating and supplying electricity to the partner rice milling industry.

Recurring income is therefore assumed from the renewable energy division as this venture will enhance the Group's earnings, as more of its produced biomass energy capacity will be taken up for an extended period of >20 years, coupled with the previously signed PPA with Electricité Du Cambodge to supply 48,000MW/annum of capacity for >10 years.

Outperform. Our recommendation is thus further strengthened, seeing as its earnings visibility is for the longer-term therefore supporting our view that Wah Seong is undervalued at this juncture. At c urrent price levels, only a 10.7x PE to our FY15F EPS of 14.5sen is reflected.

Rice husk catalyst. To recap, it is i) an abundant and cheap resource, with Cambodia's rice milling sector producing potentially 1.6m mt of rice husk annually. At present only c.10% of the rice husk is used as fuel biomass for waste-to-energy technologies. ii) 1 ton of rice paddy produces c.220kg rice husk which is equivalent to 410-570 kWh of electricity. The calorific value is 3,000kcal/kg with moisture content of 5-12%. iii) Benefits of using rice husk technology include; providing electricity while promoting disposal of agricultural waste; steam generated can be used for paddy drying applications, thus boosting local incomes and reducing the need to import fossil fuels; rice husk ash, a byproduct of rice husk power plants, can be used in the cement and steel industries further decreasing the need to import these materials.

Source: PublicInvest Research - 9 Dec 2014