Pestech’s 15MFY15 earnings of MYR32m are in line with our and streetestimates. Thus, we maintain our BUY rating and TP of MYR6.18 (+24% upside). We like the company’s unique business proposition, as it rides on fast-growing regional demand for electricity. Furthermore, there is huge potential in its new business ventures into rail electrification,system automation and data management.

• Results on track. Pestech International’s (Pestech) 15MFY15 net profit of MYR32m was at ~77% of ours and street estimates, but we deem its results as being in line since we expect it to record a stronger final quarter. Its 5Q revenue of MYR73.3m was up 9.8% QoQ but profit remained flat at MYR7.6m. We are not overly concerned, even though its NPM fell to 10.4% in 5Q – which is still within its normal margin band.
• Tapping into fast-growing electricity demand. On the domestic front, Tenaga Nasional (TNB) (TNB MK, BUY, TP: MYR17.70) has proposed a total capex of MYR23.3m for 2014-2017 while Sarawak Energy (SEB) has raised a total of MYR15bn to finance its expansion. Pestech also has a solid foothold in Cambodia, Laos and Myanmar, and is actively seeking opportunities in Sri Lanka and the Philippines currently. Recently, the company won the first transmission line project in Cambodia on a build-operate-transfer (BOT) basis. The robust electricity requirement in this region certainly bodes well for the company.
• Expanding beyond power transmission systems? Pestech is also keen to expand its foothold into electrification projects for rail systems after it bought over certain rail equipment from Balfour Beatty (BBY LN, NR), as it has noted various opportunities in terms of double-track services into providing system automation and data management via its technology unit.
• Maintain BUY, with a TP of MYR6.18. We prefer to keep our original projection of MYR300m/MYR500m new contract wins in FY16/FY17, but do not discount its potential of winning more contracts going forward. Pestech’s unique business proposition – riding on fast-growing electricity demand in the region – justifies its premium valuation vis-à-vis typical utility giants. Using a 18x FY16F (Jun) P/E and the DCF value of its recently-won BOT transmission system project in Cambodia, we derive a TP of MYR6.18. Reiterate BUY.