· Two different distinct earnings stream. TEKSENG is involved in two main sectors namely: (i) plastics and (ii) solar energy. Within the plastics segment, it is engaged in the manufacturing and trading of polyvinyl chloride (PVC) related products and PP non-woven products. TEKSENG ventured into solar energy business in 2011 and started production since 2012. In the solar energy segment, TEKSENG manufactures and sells solar cells, panels and modules.

· Explosive earnings growth from solar energy segment. TEKSENG is currently operating one solar cells production line with capacity of 70.0MW p.a. In Sep 2014, TEKSENG announced that its 68.1% owned subsidiary TS Solartech Sdn Bhd has entered into a MoU with Solartech Energy Corp. (SEC) for the purpose of a strategic alliance. SEC intends to invest RM100.0m in TS Solartech by adding another two new production lines in 1Q15 and 3Q15, which will triple its current production capacity to 210.0MW p.a. This will turn around the solar energy segment from a net loss of RM0.5m in 9M14 to net profit of RM5.0m in FY15E (assuming net margin of 2.5%). Imputing this, we assume net profit to grow with 2-year CAGR of >100.0% for the period FY13-FY15E which implies FY14-FY15 Fwd. PER of 12.6x-10.6x, respectively.

· Steady plastics play. Its plastics business recorded stable single-digit revenue growth for the past three years (in the range of 2.0% to 8.0%). We understand that management has no intention to expand its plastics segment aggressively. Thus, we are expecting a steady 2.0% revenue growth from this segment going forward.

· Potential to spin off solar energy segment. We are projecting the solar energy segment to contribute 51.2% of Group’s revenue in FY15E. We see a possibility that TEKSENG could spin off its solar energy segment, so it can focus on its solar cells business and unlock value for shareholders. In fact, our recent meeting with management revealed that they do not rule out this possibility. However, timeline is uncertain.

· Issuance of free warrants. TEKSENG has proposed a bonus issue of up to 120.0m free warrants on the basis of 1 free warrant for every 2 TEKSENG shares. The warrants can be converted into TEKSENG shares anytime after being listed at the exercise price of RM0.25. The proceeds to be raised by exercising the warrants will be utilized for working capital. Assuming full conversion of warrants, it will enlarge the share base to 360.0m (from 240.0m), while fully diluted FY15E EPS is 5.5 sen.

· Fairly valued for now. We have projected FY14-15E net profits of RM16.7m and RM19.9m for TEKSENG on the back of: (i) a stable 2.0% revenue growth from plastics segment and (ii) 2-year CAGR of >100.0% revenue growth from solar energy segment. This implies that the stock is trading at a forward FY15 PER of 10.6x on FY15 basic EPS of 8.3 sen (vis-à-vis peers that are trading at 8x-10x FY15 PER). Assuming a 10.0x PER to FY15 EPS, we believe TEKSENG’ should trade closer to RM0.83. We have a NOT RATED call on the stock.

Source: Kenanga