PESTECH is now a concessionaire player after securing a 25-year power transmission contract in Cambodia yesterday. This is definitely a price catalyst to PESTECH as the recurring income of c.RM16m-RM20m p.a. almost matches its reported earnings in CY14. In addition, we see no reason for PESTECH not getting the EPC portion as well, which could be worth USD70m, of this project since it is the project owner and also due to its track record. In all, this asset will add RM0.42/share to our PESTECH’S valuation or RM0.68/share on a bullish scenario. However, net gearing will jump to 0.87x by FY17E from 0.46x in FY13. We re-rate its existing business to 16.6x PER (+1.5 3-year SD), from 15x PER, which is justified by its explosive 3.5-year CAGR of 63%. Thus, we upgrade the price target to RM6.11/SoP share from RM5.06.

OUTPERFORM maintained. Now an asset owner. Yesterday, PESTECH announced that its 60%-owned Cambodian subsidiary, Diamond Power Ltd (DPL) had completed the execution of all agreements in relation to the rights of the development of 230kV Kampong Cham-Kratie Transmission System Project on a “Built- Operate-Transfer” (BOT) basis for a concession period of 25 years. This marks the entry of PESTECH as an independent power transmitter. Under the Power Transmission Agreement (PTA), DPL will manage the BOT project, which brings the electricity supply for Electricite Du Cambodge (EDC) from the upcoming Hydro Power Lower Se San 2 hydropower plant in Stung Treng to Kratie and Kampong Cham. The total development cost for this project is USD92.21m.

A recurring income for 25 years. We are very positive with this concession award as the PTA offers a guaranteed recurring income over 25 years in contrast to its existing business where contracts only last for 2-3 years and is heavily dependent on replenishment orders. DPL is expected to receive USD12.3m/year power transmission charges for the first three operating years (scheduled commercial operation date: 30 Nov 2017) from EDC and USD18.2m/year for the remainder concession period. We understand that this project comes with 9-year zero tax allowance while the statutory corporate tax in Cambodia is 20%. As such, DPL could generate as high as USD9m PAT a year during the tax-exempt period and USD7.7m PAT per annum after the tax holiday period. Based on 60% effective stake, PESTECH could easily derive RM20m and RM16m from the asset. The earnings impact to PESTECH is substantial judging from its net profit of RM24.3m for Jan- Dec 2014.

Potential EPC contract? There is no contract award yet for the EPC portion of this BOT project at this moment. Being the largest shareholder of the concession asset and based on its EPC track record, we believe PESTECH is likely to execute the EPC portion of this project, which could be worth USD70m. Should it is able to clinch this project, PESTECH’s orderbook could jump 43% to c.RM815m from c.RM570m currently. We believe PESTECH will not stop here after this big quantum leapt project as there are at least 13 projects for 230kW transmission line up for tender in Cambodia in the next 1- 2 years.

TP upgrade to RM6.11/share. This BOT will add RM0.42/share to its SoP for CY16 valuation. A bullish case scenario could contribute RM0.68/share to PESTECH’s valuation. In our new earnings assumptions, we factored in this BOT project and also assumed it secures the EPC portion. Thus, we keep FY15E, upgrade FY16E slightly by 1.5% and launch new FY17E with 24.6% growth. Valuation-wise, we roll-over our valuation year-base to CY16 from CY15 and value its existing business at 16.6x PER (+1.5 3-year SD) from 15x PER previously. As such, we are upgrading our price target to RM6.11/SoP share from RM5.06 previously. OUTPERFORM reiterated.

RM485m contracts secured so far in FY15. In 2014, PESTECH had secured a total of RM406m worth of contracts, which includes the biggest ever contract secured in Mar 2014 from Cambodia worth RM279.7m Together with RM78m secured YTD in 2015, the total contract secured so far for FY15 is amounting to RM485m, which is just RM65m short of our FY15 replenishment order assumption of RM550m, which is fairly achievable.

Source: Kenanga