We believe Pestech’s earnings to have bottomed in FY06/20 and expect to rebound strongly and achieve CAGR of 32.9% for FY06/21-23. Growth will be underpinned by new projects contribution and improved construction progress. The group has a strong orderbook of RM2.2bn in hand (>2-years revenue coverage) and on-going tenderbook of RM1-1.2bn. We derive a fair value of RM1.78 on Pestech based on SOP.

Background. Pestech is a total solution service provider for: (i) construction of power transmission infrastructure and products; (ii) rail electrification; (iii) infrastructure asset management; and (iv) RE and EV infrastructure. Currently, the group has strong market presence in Malaysia and Cambodia with growing presence in Philippines, Thailand and Papua New Guinea. Pestech is also targeting to further expand into other ASEAN countries given the huge infrastructure investments potential in the region.

Growth in power infrastructure investments. Pestech is benefiting from Tenaga (Malaysia) and Cambodia’s substantial investments into power infrastructure. Tenaga is targeting RM27bn investment in T&D for 2021-2023 to ensure long term system sustainability and meet future MESI 2.0. Similarly, Cambodia will continue to invest heavily on T&D in order to achieve its target of electrification for 90% household by 2030 (vs. 80% in 2019) and cater for the projected doubling of peak power demand and power generation capacity by 2030 (vs. 2020) with integration of RE and digitalization. Pestech is also targeting expansion into other ASEAN countries (already entered Philippines and Papua New Guinea) given the huge potential of T&D investments in the region.

Going big into rail infrastructure. Pestech has built up strong capabilities in providing total solution for domestic rail electrification with several notable projects. We believe Pestech has good chances to secure contracts for upcoming Malaysia mega rail projects, namely: (i) MRT 3; (ii) ECRL; (iii) HSR; (iv) Johor-Singapore RTS; and (v) KVDT2. NRCOE has recently estimated project value of US$48bn for Malaysia railway projects until 2030 with target of increasing localisation to a minimum of 45%, potentially benefitting Pestech. Pestech is also targeting regional ASEAN rail projects (currently participated tender for c. RM1bn), which is estimated at USD93bn until 2035.

RE & EV venture. Pestech provides total solution package for solar projects and Microgrid projects (integrated with solar system). It currently owns a 20MW LSS in Cambodia. Leveraging onto its established regional market presence and capabilities, Pestech is set to benefit from ASEAN’s targeted new 35GW-40GW of RE capacity by 2025. Pestech is also providing EV charging solution with existing 18 EV charging stations. Management is in talks with various parties for potential EV charging stations in commercial buildings, condominiums and along the highways, which bodes well with the recently proposed Low Carbon Mobility Blueprint 2021-2030 by MGTCC to accelerate national EV adoption rate.

Financial growth. We expect core earnings CAGR of 32.7% for FY06/21-23 due to combination of new project contributions and project progress normalisation. Management revealed a historical high orderbook of RM2.2bn in hand as of end-Feb 2021 (>2x revenue coverage) and on-going tenderbook of RM1-1.2bn.

Fair value of RM1.78. We derive a conservative fair value of RM1.78 on Pestech based on SOP. We opine that the valuation is justifiable by: (i) healthy balance sheet; (ii) strong projected earnings with superior orderbook of RM2.2bn (>2x revenue coverage) and tenderbook of RM1.0-1.2bn; (iii) solid recurring cash flow from concession BOT and BOO and contracted BT projects; (iv) strong growth potential of Malaysia and regional ASEAN power and rail infrastructure investment; and (v) solid startup of RE and EV infrastructure development, in line with Malaysia and regional ASEAN’s green energy roadmap.

Source: Hong Leong Investment Bank Research - 6 May 2021