We initiate coverage in SMRT with a BUY recommendation and a TP of RM1.38 based on 20x P/E on FY25f earnings. We reckon the group is well-positioned to capitalize the ongoing digitalization trend within the utilities sector amid flourishing smart grid initiatives. We forecast SMRT’s core earnings to register a robust 3-year CAGR of 21.5%. We find SMRT to be a compelling investment opportunity, given the substantial earnings potential arising from both the utilities and financial services sectors, as well as its burgeoning recurring income base.

A pure IoT player. SMRT underwent a significant transformation from 2020 to 2023, divesting itself of several business units and evolving into a pure IoT player. Operating under the umbrella of NST, SMRT now specializes in installing, monitoring, and maintaining customized hardware solutions for its clients' operational facilities, establishing wireless network connections tailored to their specific requirements.

Riding on the digitalization wave of substations in Peninsular Malaysia. Underpinned by its "Grid of the Future" initiative, TNB is actively implementing DA systems in its distribution substations to modernize and enhance its distribution network. The DA system will require internet connectivity at the installed distribution substations to facilitate communication within the grid system. Given that these substations rely on wireless connections, this presents a favourable opportunity for SMRT, being the sole provider of dual-sim technology for TNB's distribution substations. With only 20.7k or 24.9% of the total distribution substations in Peninsular Malaysia having adopted the DA system, we anticipate that TNB will continue to accelerate its installation of DA systems in its substations going forward.

Going into Sabah and Sarawak. Leveraging on its solid track record in providing telecommunication infrastructure to TNB, SMRT is now poised to extend its services to East Malaysia, where frequent interruptions in power supply have been a significant challenge. Currently, the distribution substations in this area operate on a manual basis, leaving utility companies in a reactive mode during unplanned electricity outages. By providing connectivity to these substations, SMRT will empower utility companies to proactively detect issues, enabling subsequent manual interventions and repairs to help them attain their target SAIDI indexes.

Indonesia market, the next up leg. Indonesia continues to have a significant number of ATMs relying on satellite connections, and local ATM operators are actively transitioning to wireless connections due to the high maintenance costs associated with satellite networks. This transition works to SMRT's advantage with ATMI being its customer since 2017. Moreover, with national utility-co PLN as a key customer, SMRT is strategically positioned to capitalize on the upcoming wave of digitalization in the nation's distribution networks. Similar to TNB, PLN is implementing a smart grid initiative aimed at reducing power outage durations and frequencies.

Upward earnings trajectory to persist. We project 3-year earnings CAGR of 21.5% for SMRT. This growth is predominantly driven by (i) a consistent stream of orders from the utilities sector in Malaysia and Indonesia; (ii) the growing recurring income base will provide a more substantial foundation for earnings and improved margins; and (iii) stronger orders flow arising from Indonesia’s ATM sector.

Initiate BUY with a TP of RM1.38, as we ascribe a P/E multiple of 20x for SMRT pegged to FY25f earnings. Considering the substantial earnings potential arising from the utilities and financial services sectors and the growing recurring earnings base, we find SMRT's current FY25 forward P/E of 13.4x to be undemanding, making it a compelling case.

Source: Hong Leong Investment Bank Research - 19 Oct 2023