We have a fruitful study trip to Cambodia last week which reinforce our conviction on PESTECH for its bright prospects in this Indo-china country. Being one of the two favourite contractors of EdC, the national utility company, PESTECH should stand a fair chance of securing new contracts in this fast growing energy infrastructures development market. We learnt that at least 500MW new generation capacity will be added into the system by 2021 from 1,400MW currently. Thus, new transmission lines and substations are needed to cater for the new generation capacity.

Maintain OUTPERFORM with price target of RM6.11/SoP share. Site visit on the field. Last week, we went on our second site visit to Cambodia to look at PESTECH’s new and existing projects there, i.e., (i) the project under Alex Corp for a new 198km 230KV transmission line from West Phnom Penh (WPP) to Sihanoukville and 230/115/22KV Substation Extension Project, and (ii) North Phnom Penh Substation. In addition, we visited Electricite du Cambodge (EdC) and met up the Royal Government of Cambodia Delegate in Charge of Managing EdC, H.E. Keo Rottanak, during our visit for updates on the industry prospects there. We also met up with PESTECH’s supplier for the new 198km transmission line, GM for Asia Sales of Shandong Power Equipment Co Ltd (SPECO), Mr Tian Liuqing. In all, the visit is fruitful for us to better understand the market and client and supplier of PESTECH there as well.

Alex Corp project is progressing well. We were in the WPP Substation to check out the progress of the USD86.1m project which is at >30% progress stage currently. Meanwhile, PESTECH is using the anchor foundation technology approach in building the transmission tower’s legs which could lay four foundation legs per day as compared to the conventional pad foundation technology approach which would take four days to complete the task. In fact, this new approach is widely used in the West, but this is the first time it is introduced in this region. If successful, PESTECH will use this approach for its future project.

Receivable is not an issue. In view of the long credit term given to Alex Corp, PESTECH recorded RM107.7m receivables for amount due from contract customers as of Mar 2015. Many investors had raised concerns on this rising receivables as the project progresses. Eventually, the amount will be equivalent to USD86.1m in MYR term once the project completes in end-2017. Under the agreement, payment will be paid directly from EdC to PESTECH instead of Alex Corp who is the concessionaire of this asset. First payment will start upon project completion in early 2018 and progressive payments over six years. However, we are not overly concerned of this issue given that the payment is guaranteed by EdC while SPECO also gives PESTECH credit term of two years with first payment starting in early 2018 that matches receivable payment from EdC. Mr Tian of SPECO said the group has no problem of giving such a long credit term as the amount is small by its standard. Furthermore, it would help in their working relationship for future projects.

The preferred contractor. EdC shared with us the prospects there where the generation capacity in Cambodia is expected to increase another 500MW by 2021 from c.1,400MW currently. Presently, c.60% of the villages there have some kinds of electricity supply and EdC is targeting to reach 100% coverage by 2020. With this, we learnt there are at least seven new transmission lines needed in the near term for the electricity supply. H.E. Keo acknowledged that PESTECH is one of two preferred contractors of EdC besides China National Heavy Machinery Corp. EdC likes these two vendors for their prompt attention to request and solving problems unlike the bigger firms which are always bogged down by bureaucratic and red tapes.

Still OUTPERFORM. We remain positive on PESTECH due to the bright utility development prospects in Cambodia. Furthermore, its strong relationship with its client EdC and supplier SPECO place PESTECH in a strong position of securing new projects. We maintain our OUTPERFORM recommendation with unchanged price target of RM6.11/SoP share. 

Source: Kenanga Research - 2 Jul 2015