We continue to like Pestech International Bhd (“Pestech”) given its solid financial performance and market position as a niche utility infrastructure builder. Strong orderbook of RM1.5bn will provide earnings visibility for the next 2 years. BUY with a target price of RM1.66 premised on 14x PER FY20 as per the average of closest industry players.

Pestech marked a good start in FY20 with encouraging results for 1QFY20. Revenue was 51% higher while net profit jumped from RM10.0m to RM19.3m. We believe the earnings growth trajectory will continue to be resilient, supported by its orderbook of RM1.5bn and expect more job flows from local infrastructure projects (ECRL & KVDT Phase 2).

To recap, Pestech is principally involved in the provision of engineering, design, manufacturing, installation and commissioning of electrical power facilities. The company is into the fields of high voltage electrical system, transmission line and power cables, infrastructure asset management, rail electrification and signalling, power generation, as well as power distribution and smart grid. Pestech is one of the most well-equipped rail electrification and track work contractors in Malaysia, enabling it as a potential beneficiary for upcoming local railway contracts and has previously secured project from MRT2 and KVDT Phase 1. Its competitive strength lies on its niche utility infrastructure business model, operating in a high entry barrier industry which requires high investment and strict industry regulations.

Recent contract from Tenaga Nasional Bhd for the supply and delivery of smart meter has marked Pestech’s foray into the smart grid space. Despite the relatively small contract value c.RM38.4m, we expect more smart meters to be deployed in the near future. A total of 9.1m households across Peninsular Malaysia are expected to be equipped with smart electric meter by 2026 while 1.2m of meters are planned to be installed in the Klang Valley by 2020.

We see value emerging from current valuation of 11x PE, which is below its historical 3-year average mean of 15.8x. We remain positive on Pestech given its proven expertise in utility infrastructure and its exposure in the fast-growing ASEAN regions as well.

Source: Rakuten Research - 9 Dec 2019