PESTECH is getting its third concession asset with 70% stake in Cambodia for a 10-year “Build-and-Transfer” transmission line project worth a total payment collection of USD100m. We are positive on this as it helps to enrich its future recurring income, and provides diversification from over-reliance on EPCC contracts. We like this company for its niche utility infrastructure play. Maintain OUTPERFORM at RM1.15.

A 10-year “Build-and-Transfer” concession asset. Yesterday, PESTECH announced that its 70%-owned Cambodian subsidiary ODM Power Line Company Ltd (OPL) had completed the execution of all novation agreements in relation to the rights of the development of 230kV Transmission Line from Oddor Meanchey to East Siem Reap Grid Substation on a Build-Transfer basis. The concession value stems from committed payment from the state utilities Electricite Du Cambodge (EdC) to OPL over concession period of 10 years and one month. Payments will be paid on a monthly basis where 1st and 121st payments are both at c.USD458k each while payment for 2nd to 120th are at c.USD917k each.

EPCC portion worth about USD50m. This is PESTECH’s third concession asset, of which all are located in Cambodia, trailing after the 25-year BOT independent power transmitter Diamond Power and the 20-year BOO solar farm Green Sustainable Ventures. PESTECH is expected to book in two streams of earnings from this project, i.e. the 10-year concession fees and an EPCC contract which is valued at c.USD50m. Assuming this project to take 18 months to complete, with c.USD11m cash flow per year for 10 years and contract value of USD110m with 70:30 debt:equity financing at cost of borrowing of <6%, our back-on-the-envelope calculations derive and impute c.RM0.07/share into PESTECH’s SoP valuation matrix.

To improve recurring income. To lessen reliance on EPCC and product earnings, this 3rd concession asset is timely, strengthening its recurring income base further. The BOT which started operations in Jan 2018, contributes c.RM15m to bottomline. For now, we keep our estimates unchanged as OPL is likely to commence in late-FY22 which is beyond our estimate horizon. Meanwhile, the COVID-19 is likely to impact mildly on project progress as all its local projects are proceeding during this Movement Control Order period while its Cambodia project is also business as usual. The sizeable outstanding order-book of c.RM1.6b will sustain earnings growth for the next two years.

Keep OUTPERFORM. We are positive on this concession asset as it helps to lessen reliance on EPCC with stable recurring cashflow over the next 10 years. Although borrowing is set to increase, it is mainly ring-fenced financing like the other existing borrowings which is fairly safe. In all, we still 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. Thus, we maintain our OUTPERFORM rating with unchanged target price of RM1.15 which is based on -1SD PBV 5- year mean of 4.04x under the currently depressed market condition. Nonetheless, a “business as usual” fair value will be RM1.45 which is based on PBV of 5-year mean of 5.23x. Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 4 Jun 2020