Pestech International Bhd
(July 2, RM5) 
Maintain “outperform” with an unchanged target price (TP) of RM6.11: We had a fruitful study trip to Cambodia last week which reinforced our conviction that Pestech International has bright prospects in this Indo-China country. 

Being one of the two favourite contractors of national utility company Electricite du Cambodge (EDC), Pestech should stand a fair chance of securing new contracts in this fast-growing energy infrastructure development market. We learnt that at least 500mw of a new generation capacity will be added to the system by 2021 from 1,400mw currently. Thus, new transmission lines and substations are needed to cater for the new generation capacity. 

Last week on our second site visit to Cambodia to look at Pestech’s new and existing projects there namely: i) the project under Alex Corp Co Ltd for a new 198km 230KV transmission line from West Phnom Penh (WPP) to Sihanoukville and 230/115/22KV substation extension project; and ii) the North Phnom Penh substation. 

In addition, we visited EDC and met up with Keo Rottanakthe, the Royal Government of Cambodia delegate in charge of managing EDC, for updates on the industry prospects there. We also met up with Shandong Power Equipment Co Ltd (Speco)  general manager for Asia sales, Tian Liuqing. Shandong is Pestech’s supplier for the new 198km transmission line. In all, the visit was fruitful for a better understanding of the market, and of Pestech’s clients and supplier there as well. 

The Alex Corp project is progressing well. We were in the WPP substation to check out the progress of the US$86.1 million (RM325.5 million) project. It is now at a more than 30% progress stage. Meanwhile, Pestech is using the anchor foundation technology approach in building the transmission tower’s legs which could lay four foundation legs per day compared with the conventional pad foundation technology approach which would take four days to complete the task. In fact, this new approach is widely used in the West, but this is the first time it is introduced in this region. If successful, Pestech will use this approach for its future project. 

Receivables are not an issue. In view of the long credit term given to Alex Corp, Pestech recorded RM107.7 million receivables for the amount due from contract customers as of March 2015. Many investors had raised concerns about these rising receivables as the project progresses. Eventually, the amount will be equivalent to US$86.1 million in ringgit terms once the project completes at end-2017. 

Under the agreement, payment will be paid directly from EDC to Pestech instead of Alex Corp, which is the concessionaire of this asset. The first payment will start upon project completion in early 2018 and progressive payments over six years. However, we are not overly concerned about this issue given that the payment is guaranteed by EDC while Speco also gives Pestech a credit term of two years with the first payment starting in early 2018 that matches receivable payment from EDC.

Tian said the group has no problem giving such a long credit term as the amount is small by its standards. Furthermore, it would help in their working relationship for future projects. 

EDC shared with us the prospects there where the generation capacity in Cambodia is expected to increase another 500mw by 2021 from about 1,400mw currently. Presently, about 60% of the villages there have some electricity supply and EDC is targeting to reach 100% coverage by 2020. 

With this, we learnt that there are at least seven new transmission lines needed in the near term for the electricity supply. Keo acknowledged that Pestech is one of two preferred contractors of EDC besides China National Heavy Machinery Corp. EDC likes these two vendors for their prompt attention to requests and solving problems unlike the bigger firms which are always bogged down by red tape. 

We remain positive on Pestech due to the bright utility development prospects in Cambodia. Furthermore, its strong relationship with its client EDC and supplier Speco places Pestech in a strong position of securing new projects. We maintain our “outperform” recommendation with an unchanged TP of RM6.11 per sum-of-parts  share. — Kenanga Research, July 2

This article first appeared in The Edge Financial Daily, on July 3, 2015.