Our visits to Pestech’s operational sites in Cambodia reaffirmed our view of its plentiful business opportunities in this fast-growing country. Maintain BUY and MYR6.18 TP (24% upside), as we continue to like the company’s unique business proposition, which rides on fast-growing regional demand for electricity. Furthermore, we see huge potential in its other businesses in the region.

On the ground in Cambodia. Last week, we visited Pestech International’s (Pestech) operations in Phnom Penn, Cambodia. The visits proved to be an eye-opener in this fast-developing country, which has a population of over 15m people.

A solid footing in Cambodia. Pestech made inroads into Cambodia in Jun 2013 via a transmission line project that was commissioned seven months ahead of the contractual requirement. Its track record was wellreceived by Electricité du Cambodge (EDC), which lauded the companyduring our meeting with the state-owned energy supplier. We identify the key areas of business opportunity for Pestech as follows: i) connecting standalone power plants to the national grid, ii) upgrading existing line sto higher voltage transmission lines driven by escalating power demand, and iii) linking main transmission lines to villages currently without power.

Expanding beyond Cambodia. Not only Cambodia, Indochina as a whole and many other developing regions are seeing unprecedented social and economic growth, which translates into high power requirements. Already, Pestech has established a footprint in Laos, Myanmar and Sri Lanka, as well as many nations in the African continent. The company also has good financial support from its equipment supplier, Shandong Power Equipment Co Ltd (Shandong Power), whose Asia sales GM joined us on some of the visits. He explained that the 2-year credit term given to Pestech was based on the company’s financial strength and that Shandong Power is keen to growits business in the region with Pestech.

Reiterate BUY and MYR6.18 TP. We continue to believe that Pestech’sunique business proposition – riding on fast-growing electricity demand in the region – justifies its premium valuation vis-à-vis typical utility giants. Using a P/E multiple of 18x FY16F plus DCF value of its recentlywon build-operate-transfer (BOT) transmission system project in Cambodia, we derive a MYR6.18 TP. Maintain BUY.

Visits To Pestech’s Operations In Phnom Penh On the ground in Cambodia. Last week, we visited Pestech’s operations in Phnom Penh, Cambodia with other fund managers and analysts at the company’s invitation. Indeed, the trip proved to be an eye-opener in this fast-developing country.Quick facts about Cambodia. Officially known as the Kingdom of Cambodia, the South-East Asian nation is located in southern Indochina Peninsula. With total landmass of 181,035 sq km, the country is bordered by Thailand (northwest), Laos (northeast), Vietnam (east) and the Gulf of Thailand (southwest). With a population of over 15m, Cambodia is the 69thmost populous country in the world. The official religion is Theravada Buddhism, practiced by approximately 95 % of the population. The country's minority groups include Vietnamese, Chinese, the Cham people and others. The capital is Phnom Penh, which is the largest city and the political, economic and cultural centre of Cambodia. The country is a constitutional monarchy,with Norodom Sihamoni – a monarch chosen by the Royal Throne Council – as head of state. The head of Government is Hun Sen, who is currently the longest-serving non-royal leader in South-East Asia and has governed Cambodia for over 25 years.

Powering up Cambodia. Pestech’s expertise in the provision of comprehensive power system engineering and technical solutions allows it to tap into the fastgrowing power demand across ASEAN. The company made inroads into Cambodia via its first transmission line project, which was successfully commissioned seven months ahead of the contractual requirement in Jun 2013. It subsequently won a contract from Alex Corp Co Ltd (Alex Corp), to design, engineer, manufacture, install, test and commission the 198km 230 kilovolts (kV) West Phnom Penh-Sihanoukville transmission line and 230kV/115kV/22kV substation extension project. The contract is valued at USD86.1m in total and is slated for completion within 32 months.

Moving up the value chain as an independent power transmitter (IPT). In April, Pestech mark an important milestone as its 60%-owned subsidiary Diamond Power Ltd (DPL) entered into a power transmission agreement (PTA) with EDC to developthe 230kV Kampong Cham-Kratié transmission system project on a BOT basis. The project is being developed to bring electricity to Kratié and Kampong Cham from the upcoming Lower Sesan 2 (LS2) hydroelectric power plant in Stung Treng. Total investment cost is estimated at USD92.2m. With the PTA, Pestech is set to become an IPT, with charges to be paid by EDC to DPL on the following terms: i) years 1-3: USD12.3m pa, and ii) years 4-25: USD18.3m pa. Meanwhile, we value the BOT based on a DCF value of USD33.6m, or MYR0.37 per share for Pestech’s 60% stake in the unit. Aside from the long-term recurring income, DPL awarded USD60.6m of the contract to Pestech to undertake the designing, building, testing and commissioning of the 230kV Kampong Cham-Kratié transmission system project.

Room for more contracts from EDC. We were honoured to have Mr Keo Rottanak, the delegate in charge of managing EDC, hosting us in an hour-long meeting at his office. EDC is Cambodia’s state-owned utility company. We understand that it currently has power generation capability of 1,400 megawatts (MW), up from merely 100MW back in 2000. EDC’s unit is currently planning for another 500MW of coalgenerated power by 2021. Although all the ongoing and upcoming new power plants are already well-linked by various existing or ongoing transmission line constructionworks, we sense that much effort is still needed to connect some of the standalone power plants to the national grid. Apart from that, EDC targets to have all villages linked to the power supply grid, vis-à-vis the current 60% that enjoys a modicum of power supply. Mr Keo also emphasised transmission line stability, and hence power supply to end-users. This suggests that many old transmission lines may requirereplacement to higher voltage cable. Aside from that, hydroelectric power has been Cambodia’s major source of power. However, supply may not be sufficient during dry spells but could be in excess during the rainy season. Meanwhile, Cambodia importsand exports some power from/to Thailand, Vietnam and Laos, depending on availability. This means that the country’s transmission system requires improvement.EDC compliments Pestech’s track record. We see that Pestech may havesuccessfully earned the trust of EDC after delivering high-quality and fast-track worksin the past. At the meeting, Mr Keo said that EDC would be happy to establish a professional working relationship with Pestech and this positive affirmation from EDC opportunities in Cambodia, we are confident of Pestech winning more projects in this fast-developing country. Meanwhile, according to EDC, the mode of financing for new projects would be dependent on available funding from the Cambodian Government. Hence, we are unsure whether the new projects will be on a BOT basis or just a standard construction contract.

Introducing new piling technique to speed up works. Recognising that its two new transmission line projects require fast delivery, Pestech recently brought in a new piling technology to Cambodia. This technology is currently used in Europe. We had a chance to see the new technology at work at Pestech’s site in West Phnom Penh (see Figure 4). This new piling machine is said to be capable of completing up to four structures a day vs traditional methods that require up to three days to complete a similar job. Management admits that the construction cost is likely to be almost similar to that of traditional methods, as it involves high cost of mobilising theequipment. However, it is able to speed up construction works. We believe such efforts may eventually be recognised by EDC, which may then offer more pipeline works to Pestech.

Expanding beyond Cambodia. Besides Cambodia, the whole of Indochina is seeing unprecedented social and economic growth, which translates into high power requirements. Earlier, Pestech had managed to sign a contract agreement with Electricité du Laos (EDL) to build a 115kV double-circuit transmission line from Pakseto the Laos-Thailand border on a turnkey basis. The company has also established contact with the utilities authority in Myanmar to participate in the country’s electricity grid build-up. Pestech’s other success stories include an on-time completion of an electric transmission substation project in Sri Lanka and venturing into another new market in the African continent after its successful foray into Ghana in early 2013. As at March, Pestech’s tenderbook stood at MYR1.35bn.

Outstanding orderbook to keep it busy for the next two years. Meanwhile, Pestech’s outstanding orderbook to-date stands at MYR767m, which should keep the company busy for the next two financial years. We expect the company to win MYR300m/MYR500m of new orders in FY16/FY17 respectively. While we assume its total orderbook secured in FY15 is for a period of 18 months due to a change in FYE, we believe Pestech can easily beat our assumptions. This is based on its solid track record and proximity to customers, helped by fast-growing electricity demand in the region.

Source: RHB Research - 3 Jul 2015