- Best OR stock so far. Since our initial recommendation on this stock 12 months ago, the share price has rallied more than 2- fold from RM1.18 in Feb last year, making it the best OR stock ever. The strong share price performance is backed by an earnings growth story coupled with a compelling valuation level. Since our foray, Pestech has secured a total of RM331.5m worth of contracts.
- Now under core coverage. Despite the impressive share price performance, we believe it is still not too late to accumulate this under-researched niche player in the energy infrastructure industry. PESTECH is a triple-play for these attributes: (i) explosive earnings growth, (ii) alternative power play besides the integrated utility company and IPPs, and (3) proxy to the fast-growing ASEAN economy. We are extending coverage of this stock to core coverage for institutional clients. We are initiating coverage on PESTECH with an OUTPERFORM rating with a target price of RM4.25/share (please refer to our Initiation Report dated 20/02/14).
- An alternative power play. It 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 grabs while SCORE has planned to generate c.28,000MW of power by 2030. This positions PESTECH as an alternative play - Proxy to the fast growing ASEAN economy zone. Out of the five countries with fast growing energy infrastructures development in ASEAN, PESTECH has already landed 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 the population are still 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 p.a. 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 upon commencement of its manufacturing facility and profit margin is likely to improve given that the Product segment fetches better operating margin of c.20% versus c.18% at the Project segment.
Source: Kenanga
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