Although winning a small RM38.4m Smart Meter contract, we see this is just the beginning of more such contract to rollout as 1.2m meters are targeted to be installed by 2020 which could worth RM1b. That aside, with the revival of mega transportation infrastructure projects, contract flow should keep rolling out soon and PESTECH is likely to stand a chance to secure given its technical capacity. As such, our OP call remains on the stock with unchanged TP of RM1.75.

Bagged Smart Meter contract. Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd had received a Letter of Award from TENAGA (MP; TP: RM13.40) for the supply and delivery of Smart Meter for Smart Billing Project Deployment Phase 2, i.e., in Selangor, Kuala Lumpur, Putrajaya and Cyberjaya, in 2019 and 2020, for a total contract amount of RM38.4m. This is the second phase of implementing Smart Meter after the pilot project in Melaka with a total of 300,000 meters having already been installed between 2016 and 2018. We have learnt that PESTECH will start installing the meters soon and the contract is valid till end of 2020.

Small contract but more to come? This small contract is its first contract win in FY20, albeit small value against its orderbook of RM1.6b as at Jun 2019. We believe there are many Smart Meter contracts to be released in stages soon as there are 1.2m meters targeted to installed in Klang Valley by 2020. According to a statement made by an officer from Energy Commission in end Sep, the total cost to install the meters in Melaka and Klang Valley is worth RM1.2b. As such, we should expect to see more metering contracts to rollout in the near future. And, there are a total of 9.1m households in Peninsular Malaysia targeted to be fully installed with Smart Meter by 2026.

Current orderbook of RM1.6b to lend earnings support for the next two years. After posting a 16% jump in core earnings to RM72.4m on the back of revenue of RM810m in FY19, we expect stronger earnings over the next two years given the sizeable orderbook of RM1.6b. In addition, both ECRL and KVDT2 have been restored middle of this year and PESTECH stands a good chance to secure the electrification portion of contracts given its technical capacity. In fact, PESTECH won the KVDT Phase 1 worth RM318m in Mar 2016. While there is no indication of contract value size, we believe the combined value of these two rail electrification projects could likely boost its current book by 40%-50% should it be successful in the bidding.

An alternative attractive utility play; OUTPERFORM maintained. We continue to like this niche utility infrastructure play which could potentially benefit from the revival of mega projects domestically and the fast growing energy infrastructure development market in Cambodia. Given the growth potential of 26%-14%, at PER of 11x-10x for FY20-FY20, we believe the market is still not appreciating the growth potential in this stock. While keeping our estimates unchanged, we maintain our OUTPERFORM rating at target price of RM1.75/SoP share. Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 12 Nov 2019