A home-grown integrated electric power technology group, PESTECH is an alternative play for the power sector both locally and internationally, competing directly with global giants like ABB and Siemens for energy infrastructure projects, particularly in the fast-growing ASEAN countries in Indochina. This also makes PESTECH an investment proxy to the growing economy of emerging and developing countries. Although its share price has tripled in the past one year, we believe it is still not too late to accumulate this stock, which is the only listed energy infrastructure company on Bursa Malaysia. Further upside potential is supported by its sizeable order-book of c.RM400m and high chance of clinching projects from its tender-book of c.RM1b. We are initiating coverage on the stock with an OUTPERFORM at a price target of RM4.25/share.

A home-grown company. Started in 1991 as an electrical trading company, Pestech International Bhd (PESTECH) has grown into an integrated electric power technology group with local and international presence and was listed on Bursa Malaysia in May 2012. The group is principally engaged in the provision of comprehensive power system engineering and technical solution for the design, procurement and installation of high voltage (HV) and extra high voltage (EHV) substations, transmission lines and underground cables, focusing on assembly & manufacturing of power & control products used in the transmission & distribution of electricity.

An alternative power play. PESTECH should benefit from the on-going construction of new power plants in the Peninsular, like the 2,000MW coal fired Track 3B Project, and other mega infrastructure projects in the country, such as the USD20b RAPID development in Pengerang and the ambitious SCORE in Sarawak. A 1,200MW power plant is proposed in RAPID with c.RM250m worth of grid interconnection facility contract up for grab. We understand that PESTECH is at the pre-qualification stage for this project. Its project track records with Sarawak Energy placed PESTECH favourably to clinch contracts from SCORE, which planned to generate c.28,000MW of power by 2030. This positions PESTECH as an alternative play for the still booming power sector besides TENAGA and the IPPs.

Proxy to the fast-growing ASEAN economy zone. Out of the five fast growing energy infrastructures development countries in ASEAN, PESTECH has already made its footprint in Cambodia and Laos and is currently working to make inroad into Myanmar and the Philippines. Potential in these four countries is huge where 22%-66% of population are without access to electricity with annual GDP growth of c.5% till 2020. The average annual investment in transmission and distribution networks in ASEAN is c.USD19b/year over 2013-2020 and would reach USD32b/year over the period of 2031-2035.

Expecting explosive 3-year earnings CAGR of 57%. From a low-base of RM16.6m net profit in FY12, PESTECH is set to grow its bottom-line tremendously over the next 2-3 years by 57% 3-year CAGR given its considerately sizeable order-book of c.RM400m with potential new orders coming from Indochina. From FY16 onwards, PESTECH should see good earnings proportion of contribution from its Product segment once the manufacturing facility is ready. Profit margin is likely to improve by then given that the Product segment fetches better operating margin of c.20% versus c.18% at the Project segment.

Initiating with OUTPERFORM at RM4.25/share. Although its share price has tripled in the past one year, we believe it is still not too late to own this stock as the expected earnings growth is still not fully reflected in its share price yet. In addition, it also offers a decent yield of 3%-4%. Thus, we are initiating coverage on the stock with OUTPERFORM rating with a price target of RM4.25/share, based on CY15 10x PER.

Source: Kenanga