Pestech International Bhd
(Jan 16, RM1.31)
Maintain outperform with an unchanged target price of RM1.75: Pestech International Bhd has announced that its indirectly wholly-owned subsidiary Astoria Solar Farm Sdn Bhd (ASF) is acquiring a 94% stake in Green Sustainable Ventures (Cambodia) Co Ltd for US$4 million (RM16.28 million) from two individuals, namely Salah A Essa and Sachithanathan Muniandy R Sambu.

Under the proposed acquisition, ASF would have the supermajority rights over the development of a 20-year concession with an additional one-year period of construction for a not-less-than-20MWac (24MWdc) large-scale solar farm project in Bavet city, Svay Rieng province, Cambodia via a long-term power purchase agreement with Eletricite du Cambodge, a local electric utility company, under the build-own-operate model with a power purchase price of 7.6 US cents per kWh.

We are positive on the move, catapulting Pestech into the power generation business with recurring income over the next 20 years. This is also its second concession business following an independent power transmitter, Diamond Power Ltd, in Cambodia that started operating in January 2018.

The capital expenditure of this solar farm is estimated at US$20 million, with a commercial operation date scheduled for October this year. We have learnt that it is a 70:30 debt-to-equity financing with cost of borrowing of less than 6% and a 10% internal rate of return.

Based on this information, our back-of-the-envelope calculation derives a profit of about US$2.8 million a year and it could also add about three sen per share into Pestech’s sum-of-the-parts (SOP) valuation matrix. As ASF will be the engineering, procurement and construction constructor for this solar farm project, Pestech is expected to generate profit during the construction period.

To lessen reliance on engineering, procurement, construction and commissioning as well as product earnings, this second concession asset is timely, building its recurring income base further.

For now, we keep our earnings estimates and SOP valuation of RM1.75 per share unchanged, pending further information from the company. Meanwhile, its order book of RM1.7 billion should be able to support earnings growth for the next two years. We expect its earnings to grow 26% and 14% for the financial year ending June 30, 2020 (FY20) and FY21 respectively.

We continue to like this niche utility infrastructure play which could potentially benefit from the revival of megaprojects domestically and the fast-growing energy infrastructure development market in Cambodia. At estimated price-earnings ratios of 11 times and 10 times for FY20 and FY21, the stock is fairly attractive given its earnings growth potential as mentioned above. — Kenanga Research, Jan 16