We are positive on Pestech’s latest MOU with SDEE as we believe it would be synergistic to its existing business. Retain BUY with a higher MYR6.83 TP (16% upside). Apart from potential technology transfer from SDEE, the collaboration may offer room for Pestech to undertake more IPT concessions in Cambodia, with SDEE supplying relevant equipment and providing necessary funding via equity participation.

MOU with SDEE. Yesterday, Pestech entered into a memorandum of understanding (MOU) with Shandong Electrical Engineering & Equipment Group (SDEE) to jointly develop the power infrastructure market in Cambodia. The focus is on two areas: i) to jointly set up a distribution transformer manufacturing plant in Cambodia, and ii) to become joint equity partners of a special-purpose vehicle company to undertake procurement of power transmission agreement or power systems infrastructure concession projects.

Briefly on SDEE. SDEE is a subsidiary of State Grid Corporation of China (SGCC). SGCC has CNY200bn in registered capital with 1.87m employees servicing 1.1bn people in 26 provinces in China. It was ranked seventh on the Fortune Global 500 in 2013.

Potential synergistic tie-up. We are upbeat on the latest MOU but mindful that it is still a non-binding agreement. The potential set-up of a distribution transformer plant would benefit Pestech in terms of technology transfer and a new income stream. That said, we are more excited about possible financial backing via equity participation by SDEE. This would allow Pestech to bid for more independent power transmitter (IPT) concessions which presently offer a decent internal rate of return (IRR) of >10%, while Pestech still keeps its role in project execution and construction. Already, SDEE is supplying relevant equipment to a project awarded by Alex Corp Ltd in Cambodia. However, some investors are concerned as to the rising amount due from contract customers of this project, although management has assured that its cash flow matches the 2-year credit term offered by SDEE. We believe SDEE’s keen interest to strengthen its ties with Pestech may help ease such concerns. In view of the positive development, we raise our target P/E multiple to 20x from 18x FY16F (Jun). Together with the DCF value of its recently-won build–operate–transfer (BOT) transmission system project in Cambodia, we derive a higher TP of MYR6.83 (from MYR6.18). Reiterate BUY.

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Source: RHB Research - 31 Jul 2015