INVESTMENT MERIT

- Site visit on the field. We went on a site visit to Cambodia last week to look at PESTECH’s major projects there i.e. 1) a 98km transmission line from North Phnom Pehn (NPP) to Kampong Cham and 2) NPP Substation. This visit was beneficial and has helped us to better understand PESTECH’s business in the country. The two projects above are ahead of their schedules with the transmission line ahead by eight months (completing in May 2013) and the NPP Substation by one month (completed in Mar 2012).

- A booming utility sector in Cambodia. During our visit, we met up with the TENAGA alike state-owned power utility player, Electricite Du Cambodge. We understand that a new installed capacity of 1500MW is being planned, which will ensure the absence of blackouts in the city by 2015. With this new capacity, a total of 10 substations (c.USD20m each) would be needed. In the past 2-3 years, the electricity demand growth was 20%-25% p.a. in Cambodia and this strong growth phase is expected to continue to the next 4-5 years.

- Tenders for two projects. Pestech has submitted a small tender (USD1m-USD2m) in Cambodia recently and it has also recently tendered for its first project (USD20m) in Laos, with both outcomes likely to be known in the next 2-3 months. The gross margins for these projects are expected to be c.20%-25%. Meawnhile, we have upgraded our FY13E EPS by 3.5% after factoring its recent USD3.0m contract won in Mali.

- Still a Trading Buy. The share price has risen impressively by 49% since our first report on 26 Feb and has also surpassed our initial fair value of RM1.42. Post-earnings upgrade, we are upgrading its new fair value to RM1.96, based on 8.0x FY13 PER (from 6x previously), which is still below the FBMKLCI small cap average PER of 8.5x. The stock is now trading at 7.2x CY13 PER vs. YTLPOWR and TENAGA of 9.5x-12.5x PERs.

SWOT ANALYSIS

- Strength: Strong technical expertise and experienced management personnel.

- Weaknesses: Dependency on a few specific third manufacturers to supply components.

- Opportunities: Expanding its overseas presence to new markets such as Loas, Myanmar and Vietnam as these countries currently have increasing electricity demand.

- Threats: Changes in economic, political and regulatory conditions will affect the company as its earnings are highly correlated to the global economic conditions.

TECHNICALS

- Resistance: RM1.78 (R1), RM1.87 (R2)

- Support: RM1.50 (S1), RM1.31 (S2)

- Comments: Following a “Bullish Pennant” breakout earlier last week, PESTECH’s share price has now come close to the RM1.80 measurement objective. We reckon that traders should adopt a strategy of buying on weakness (at the RM1.67 and RM1.50 support levels) from here, rather than to buy into a rally.

BUSINESS OVERVIEW

Established as an electrical trading company in 1991, the group has grown into an integrated electric power technology company with an international presence. The group has been growing its overseas market business progressively since 2007. Its has since won contracts for both products and projects in Papua New Guinea, Tazania, Sri Lanka, Ghana and Cambodia. PESTECH was listed on Bursa Malaysia in May 2012.

CORE BUSINESS SEGMENTS

- System design. The company is involved in the design and construction of electrical power transmission lines and underground cables connections for electricity transmission and distribution in the local and international market.

- Engineering. The company services encompass High Voltage and Extra High Voltage substation engineering, control and protection to serve the needs of modern power companies and industrial plants

- Infrastructure provider. The company manufactures its own communication, protection and control products for use in its own projects as well as to be sold as finished products.

Source: Kenanga