We recommend a Buy on Pestech, with a FV of RM2.33, pegged to 10x its projected FY13 P/E. The company is involved in the provision of power transmission systems engineering and solutions for high voltage and extra-high voltage substations, transmission lines and underground cables. It has a total orderbook of RM235m as at end January 2013. TNB is its main client for power transmission system services nationwide. Pestech is also tapping into the fast growing demand for power in Sarawak, having sealed two contracts within SCORE. It has also made a foray into other South-east Asian countries such as Cambodia and Laos, where there are tremendous opportunities due to the scarcity of and growing demand for electricity.

Integrated electricity transmission system provider. Pestech is a one-stop electricity transmission system provider in Malaysia. The company is capable of providing comprehensive power system engineering and technical solutions for the design, procurement and installation of high voltage (of 11kV-230kV) and extra high voltage (above 230kV) substations, transmission lines and underground cables for electricity transmission and distribution. Pestech also manufactures its own communication, protection and control products for use in its projects as well as to sell as finished goods to third parties.

Foray into Laos. In September 2012, Pestech entered into a memorandum of understanding (MoU) with VLV Soumpholphakdy Sole Co. Ltd (VLV) and Electricite Du Laos (EDL) to undertake the feasibility on the execution of 115kV transmission line project from Pakse to Lao-Thai border. The 40km electric transmission line will connect power generated from the hydropower plants in Saravanh, Laos to Thailand. We believe that sealing its first contract from EDL would pave the way for Pestech to snap up more contracts in Laos in the future. In November 2012, Pestech has teamed up with a Vientiane-based developer, UPL Lao Co Ltd, to jointly explore on the feasibility of setting up a power supply infrastructure to the Dongphosy Specific Economic Zone (DSEZ), Laos. DSEZ is one of the 10 specific economic zones that focus on tourism, trade, services and industries with total investment cost of USD50m.

Tapping into fast growing power demand in Sarawak. Pestech has eight local projects in hand, with three projects located in Murum and Samalaju of Sarawak. The first project involves design, supply, delivery, erection and commission of the Murum Junction substation. The substation is connecting to Murum Dam, one of the major hydropower projects in Sarawak. Last year, Pestech won a job from OM Materials (Sarawak) Sdn Bhd (OM Materials) for construction of a 275kV substation in Samalaju Industrial Park, Bintulu. In the same year, the company secured another job in Samalaju Industrial Park from Korea-based Asia Cement Co Ltd for construction of 132/33/6.6kV substation. Continuous growth in electricity demand, partially foster by development in the Sarawak Corridor of Renewable Energy (SCORE), bodes well for Pestech’s future prospect.

BUY, FV of RM2.33. We like Pestech as a one-stop power transmission system service provider offering a comprehensive range of electrical power transmission and distribution services that include substations, transmission lines and underground cable works. Besides, the stock offers exposure to the tremendous growth potential in the developing countries, where there is a need to ramp up electricity supply. There are no direct comparable listed peers for Pestech, which was listed only in May last year; hence it is not viable to use historical P/E for the stock’s valuation. We are recommending a BUY on Pestech, with a RM2.33 price target, pegged to a 10x P/E, which we deem it is reasonable with 3.4% FY13 dividend yield at our price target.

Source: RHB