PETALING JAYA: Main Market-listed Pestech International Bhd got its break from merely being a turnkey contractor in the power sector to an independent power transmitter in the power generation business – thanks to a US$92.21mil (RM334mil) project in Cambodia.
Last Wednesday the company’s 60%-owned subsidiary Diamond Power Ltd took over the job of developing a 230kV transmission line between Kampong Chom and Kratie from Cambodian-state owned Electricite Du Cambodge (EDC). The project will transmit electricity from the upcoming Hydro Power Lower Se San 2 plant in Stung Treng to Kratie and Kampong Cham.
In return for developing the transmission line, Pestech will get a 25-year concession to operate the line and stands a good chance in clinching the engineering, procurement and construction (EPC) portion of the project.
Kenanga Research estimates EPC works for the asset to be valued at US$70mil (RM256.12mil).
And that could give a 43% boost to Pestech’s order book to RM815mil from RM570mil if the company gets the job.
Pestech’s CEO Paul Lim Pay Chuan told StarBiz that they were working on the technical requirement for the project which they hope to firm up within two months.
Analysts opined that Pestech should be able to benefit from the EPC jobs because it now owned 60% of the concession. The remaining 40% of Diamond Power is held by Pestech’s partner in Cambodia.
The integrated power technology provider has ventured into the country since 2010.
“Doors have opened for us because we are able to deliver another project in Cambodia ahead of schedule. We also have the support of our local partner,” said Lim.
Lim said it did not see the need to raise funds from the market in the near term for the project because there was no necessity for too much capital.
The company expected to fund the S$92.21mil (RM334mil) project that is to be done over three years via internally-generated fund and bank borrowings.
Kenanga Research estimated Pestech’s gearing to increase to 0.87 times by the financial year ending June 31, 2017 (FY17) from 0.46 times in FY13.
Analysts are positive on the latest power transmission concession as it will provide a steady income stream for the company from November 2017 onwards when the project is scheduled to be completed.
“This is definitely a price catalyst to Pestech as the recurring income of RM16mil to RM20mil per annum almost matches its reported earnings in 2014,” said Kenanga Research analyst Teh Kian Yeong.
Currently, most of Pestech’s contracts last for two to three years and the company will have to replenish the order book continually.
“Prospects are bright in Cambodia because there are at least 13 projects up for grabs for the 230kV transmission line in the next one to two years,” Teh wrote.
EDC will pay Diamond US$12.25 mil (RM44.37mil) per year during the first three years of commercial operations starting end-2017.
From 2020 onwards, Diamond will be paid US$18.22mil (RM66mil) annually until the end of the concession.
Kenanga’s Teh has upgraded the target price for the counter to RM6.11 from RM5.06 as the concession would add 42 sen per share to its sum-of-parts for 2016 valuation.
The 42 sen addition is based on the assumption that the greenback is 3.50 to the ringgit based on Pestech’s 60% stake in the concession.
“At a bull-case where the cost of fund is assumed at 6% and US dollar/ringgit at 3.65, this new project could contribute 68 per sen to the valuation.”
However, Teh pointed out that interest cost would be higher from the new project and assumed a 20% project cost in FY16 and 40% each year for FY17 and FY18.
On the impact of the transmission line project to the company’s bottom line, Lim said the company was confident of maintaining its margins of between 9% to 11% after securing the concession.
“We don’t feel tight on the margins because it’s sizeable market and there is enough room for all the players,” he said.
The lack of players in the South-East Asian region opens doors for Pestech.
“It gives us an edge to compete with the bigger boys from South Korea and China,” he said.
On its dividend payout, Lim said the company would try to keep it at a minimum of 40%.
The integrated power technology provider has also grown from a RM91mil company by market cap in 2012 to RM938mil now. According to Kenanga Research, the company has registered a compounded annual growth rate of 63% over the last 3.5 years.
Lim said: “We’re in the right sector in the right region at the right time. Hopefully, we can join the big boys’ league with the likes of Hyundai and Toshiba one day.”
Kenanga has pegged a higher price-to-earnings ratio of 16.6 times from 15 times on the counter.
Year-to-date, the company has secured RM78mil worth of contracts while the total value it got in 2014 was RM406mil. It is also tendering for RM1.74bil worth of jobs.