PESTECH will own its first power generating asset by acquiring a 94% stake in a Cambodian company possessing the right to Build-Own-and-Operate a solar farm in the country with a 20-year concession to sell energy to EdC. We are positive on the move as it helps to enrich its future recurring income, diversifying away from reliance on EPCC contracts. We estimate a small earnings enhancement of USD2.8m p.a. and 3.0 sen/share added to SoP. Maintain OP at RM1.75

Acquiring a greenfield solar farm in Cambodia. Yesterday, PESTECH announced that its indirectly wholly-owned subsidiary Astoria Solar Farm Sdn Bhd (ASF), is acquiring 94% stake in Green Sustainable Ventures (Cambodia) (GSV) for USD4m from two individuals, namely Mr Salah A. Essa and Mr Sachithanathan Muniandy R Sambu. Under the proposed acquisition, ASF has the super-majority rights over the development of a 20-year concession with additional one year of construction period for not less than 20MWAC (24MWDC) large-scale solar farm project in Bavet City, Svay Rieng Province, Cambodia via a long-term PPA with Eletricite du Cambodge (EdC), a local electric utility company, under the BuiltOwn-and-Operate (BOO) model with a power purchase price of USD0.076/kWh.

A 10% IRR project. We are positive with the move, catapulting PESTECH into the power generation business with recurring income over the next 20 years. This is also its second concession business following the independent power transmitter Diamond Power Ltd (DPL) in Cambodia that started operating in Jan 2018. The capex for this solar farm is estimated at USD20m with scheduled COD of Oct this year. We learnt that it is a 70:30 debt to equity financing with cost of borrowing of <6% and a 10% IRR. Based on this information, our back-on-the-envelope calculations derive c.USD2.8m profit a year and it could also add c.RM0.03/share into PESTECH’s SoP valuation matrix. As ASF will be the EPPC constructor for this solar farm project, PESTECH is expected to generate construction profit from this project during the construction period

To improve recurring income. To lessen reliance on EPCC and product earnings, this 2nd concession asset is timely, building its recurring income base further. Based on FY18A MI, we estimated that the 60%-owned DPL contributed slightly less than 20% or RM15m to its core profit of RM72.4m in FY18. Therefore, the recurring income could double up in 3-4 years’ time when GSV matures. For now, we keep our earnings estimate and SoP valuation of RM1.75/share unchanged pending further information from the company. Meanwhile, its order-book of RM1.7b should be able to support earnings growth for the next two years o which we expect earnings to growth 26%/14% in FY20/FY21.

An attractive alternative 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. At PER of 11x/10x for FY20/FY21, the stock is fairly attractive given its earnings growth potential as mentioned above. As such, we also maintain our OUTPERFORM rating and 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 - 16 Jan 2020