• MYR0.80 FV, based on 27x EV/EBITDA, is in line with Mestron’s historical mean and supported by the larger market capitalisation vs its closest peers such as Lysaght Galvanised Steel (LYSA MK, NR) and Rohas Tecnic (RTEC MK, NR) which trade at lower EV/EBITDA multiples. We believe the premium is warranted given its leading position in the lighting pole industry, the enviable FY22-25F core earnings CAGR of 32%, strong net cash balance sheet and growing exposure to the renewable energy (RE) segment which yields attractive EBITDA margin of >50%.

• A leading local supplier of lighting poles. Mestron is the leading domestic manufacturer and supplier of galvanised street lighting poles with a good track record of executing key infrastructure and highway projects. The revival of construction activities, renewed interest in the property sector as well as government-led catalytic developments are expected to catalyse demand for lighting poles. The group’s broader product mix (specialty and decorative poles) and swift delivery timeline are a key competitive advantage, in our view.

• Riding on the coattails of JENDELA and 5G deployment. Mestron has successfully delivered about 200 towers under Phase 1 of the National Digital Infrastructure Plan (JENDELA) programme. We believe the group is well positioned to capture additional site orders under Phase 2 with the Government targeting 100% internet coverage by 2025. The ongoing 5G deployment is an added bonus.

• RE segment should drive new earnings leg up. Mestron has secured a 21-year Power Purchase Agreement (PPA) with TNB for its new 2.0MW biogas plant which should contribute MYR6m and MYR2-3m in incremental revenue and PAT under full capacity. The group is also involved in the Net Energy Metering (NEM) and Self-Consumption (SelCo) schemes with 3.3MW in rated capacity capable of generating MYR1.8m pa in recurring revenue from FY24F. We do not rule out Mestron securing further EPCC jobs in the interim given the current tenderbook of c.MYR100m.

• Earnings set to hit new highs. We project Mestron’s core earnings to grow at a FY22-FY25F CAGR of 32%, premised on: i) The expansion of the RE segment (maiden contribution from the biogas business in 2H23), ii) new order wins for conventional and specialty poles under Phase 2 of JENDELA and 5G network deployment, and iii) the recovery in the construction sector which portends stronger orders from both the public and private sectors.

• Key risks include lower-than-estimated earnings/margin, unexpected delays, slowdown in the construction sector, and the spike in raw material prices.

Source: RHB Securities Research - 6 Oct 2023