• Solar PV and ELP Specialist. Pekat Group Berhad (Pekat) is the specialist who provides end-to-end solutions to build rooftop/ground mounted solar photovoltaic (PV) systems and solar PV power plants. Besides, The Group is the CIDB G7 license contractor with the ability to provide complete Earthing and Lighting Protection (ELP) solution to customers.

• Diversified business activities provide growth opportunities while minimizing dependency on single sector. Pekat’s business is supported by 3 main revenue streams, i.e. Solar (57.4% of total revenue in FY2020), ELP (21%) and Trading (21.6%) in which each has its own customer base to minimize dependency on single sector.

• Synergistic benefits among 3 business segments. The Trading division provides synergy to the Solar and ELP Divisions as the products and accessories are being supplied to the respective projects and being able to purchase in wholesale price to enjoy cost advantage.

• Healthy orderbook. As of 3 May 2021, PEKAT’s orderbook stood at RM189.89m. RM44million of the secured order book have been billed and the remaining RM154.9 million is expected to be booked in during FY21, FY22 and FY23. Meanwhile, Pekat has secured over 22 MW and target to achieve more from the 500 MW quota offered by the program NEM 3.0 with effect from 2021 to 2023. Moreover, the Group is in the progress of negotiating the EPCC projects with the winner of LSS 4 in the near future to ensure the sustainability of its orderbook.

• Favourable solar industry outlook……. PEKAT’s Solar division has been growing substantially in the past FYs and is expected to contribute 70% revenue in FY2021. Demand for solar PV system is envisaged to grow as the result of government initiative and the declining in cost of installation for Solar PV system pricing which has been dropped by more than 70% over the decade, allowing the market to enjoy low cost of solar PV system in this technological maturing cycle. The Group expects capacity in Malaysia to grow at a compounded annual growth rate (CAGR) of more than 10% and reaching over 4GW by 2030.

• ……. on the back of government initiatives to spur green energy. Government policies and incentives act as catalysts for Malaysian solar PV industry. The Green Investment Tax Allowance (GITA), Green Income Tax Exemption (GITE) until 2023 extension was tabled in Budget 2020, along with the Green Technology Financing Scheme 3.0 which was tabled in Budget 2021 enabled the Group to undertake solar leasing activities. Solar programs initiated by the government such as NEM 3.0, Supply Agreement for Renewable Energy (SARE) program, LSS PV program, Rural Electricity Supply program and Sarawak Alternative Rural Electrification Scheme (SARES) as well as SELCO are expected to benefit the Group.

• Leader in ELP provider. PEKAT has track record of 21 years in supply and installation of ELP system for infrastructure, commercial and industrial building in Malaysia with its own brand of ELP products and accessories. The Group has secured some notable ELP projects over the years such as Merdeka 118 Tower, TRX 106, MRT 1,2,3 and LRT 3 to cement its position as one of the leaders in ELP provider locally.

• Rebound in construction industry drives ELP division. Domestic construction sector is expected to see a rebound in second half of 2021, driven by resumption of economic activities along with the major infrastructure projects which include MRT 3, LRT 3, Johor Bahru–Singapore Rapid Transit. Adding impetus is the enforcement instruction initiated by the Energy Commission Malaysia during last year on Standard MS IEC 62305 for Lighting Protection System for buildings System in which demand is further boosted given PEKAT’s ELP expertise and products.

• Robust earnings track record. The Group has recorded a 12.8% CAGR on PAT from FY2017 (RM9.5m) to FY2020 (RM 13.6m) and we expect a 2- year PAT CAGR of 9.1% in next 2 year on the back of rebound in construction sector as well as kick off of various programs in solar industry.

Valuation/Recommendation

• We derive a fair value of RM0.60 for Pekat. Our valuation is based on 20x FY22F EPS, pegging at a 10% discount to its closest comparable listed peer in local bourse – Solarvest Holding Berhad who is currently trading at 22x forward PER. The 10% valuation discount is due to the Group has smaller market share in solar industry and Pekat is not a pure solar player as ELP business is one of its main divisions. Our fair value of the stock renders 86% upside against the IPO price.

Key Risks

• Highly competitive operating atmosphere due to low entry barrier

• Change of government policy to create uncertainty to the Group’s future prospects.

• Stricter lockdown which could affect business operations of the Group.

• Rising raw material prices for solar industry.

Source: JF Apex Securities Research - 21 Jun 2021