This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.
Investors who had subscribed for the initial public offering of Pestech International Bhd, a homegrown integrated electric power technology firm, in 2012 are no doubt the envy of others now.
A quick check on Bloomberg shows that since Pestech (fundamental: 1.30; valuation: 1.10) was listed at a mere RM1, it has given its shareholders a stunning return of more than 1,000%, excluding dividends and returns from a dividend reinvestment plan.
It also rewarded its shareholders with a two-for-three bonus issue last year. Its share price has almost doubled year to date and closed at RM6.91 last Friday, giving it a market capitalisation of RM1.28 billion.
To recap, the company was valued at RM86 million when it went public three years ago. Its impressive run aside, its CEO and executive director Paul Lim Pay Chuan says the company is not resting on its laurels.
Within the next two to three years, it intends to hit the RM1 billion revenue mark, half of which will come from its traditional power transmission business of building substations and the rest from its new venture in rail electrification.
“Pestech is definitely a growth-
focused company and we hope the growth in our business will be reflected in our share price,” Lim tells The Edge.
The company will keep delivering consistent revenue and earnings growth year on year so that it can pay out 30% of its net profit, he adds.
Between Jan 1, 2014, and June 30 this year (18MFY2015), Pestech — which changed its financial year end from Dec 31 to June 30 — made a net profit of RM56.4 million on revenue of RM400.8 million. A RM181.7 million increase in revenue saw its net profit gain 25% to RM20.7 million in 2013, up from RM16.5 million previously.
Pestech is currently trading at a relatively high price-earnings ratio (PER) of 27.99 times. In comparison, other power utility firms such as Tenaga Nasional Bhd (fundamental: 1.30; valuation: 1.20) and YTL Power International Bhd (fundamental: 1.50; valuation: 1.40) are trading at a PER of about 12 to 13 times (see table).
Commenting on the stock’s valuation, Lim stresses that as long as management takes care of the “E” or earnings, the investing public will take care of the “P” or price. “I guess the PER reflects investor confidence in the company but it should be viewed in relative terms, based on the investment profile and objective of each investor,” he says.
It is worth noting that Pestech’s share premium stood at RM84.97 million as at June 30 compared with RM19.34 million as at end-2013, presenting the company with an opportunity to capitalise it as bonus shares.
“We are always attentive to corporate developments in the group and watchful of the liquidity of the shares and capital base. Yes, we do have the capacity to embark on another bonus issue but management will carefully consider the timing and prospects of such an exercise before its implementation,” says Lim.
According to theedgemarkets.com, the likelihood of a corporate exercise at Pestech is high.
Lim, 45, has played an important role in the transformation of Pestech from a small trading house into a company with a strong presence in power transmission and distribution with operations at home and abroad. He is the nephew of Pestech executive chairman and substantial shareholder Lim Ah Hock.
Post-IPO, Pestech has expanded into medium voltage switchgear assembling, securing build-operate-transfer contracts for power transmission systems and is now well equipped to participate in the rail electrification and construction business.
“The next big thing for us should be rail electrification. We are very positive about it and we are actively preparing ourselves for it,” says Lim.
According to him, Pestech is planning to team up with foreign partners to bid for a few mega rail projects next year, including the rail electrification jobs for MRT2 and LRT3, which are estimated to be worth RM500 million and RM200 million respectively.
The group is also eyeing similar jobs in the Gemas-Johor Baru double-tracking project and the Kuala Lumpur-Singapore high-speed rail project as well as transferring its business know-how to Indonesia, Thailand and the Philippines.
The rail electrification business is expected to deliver a profit margin of 15% to 16%, which is higher than the 9% to 11% generated by its power transmission business.
Pestech took over some rail equipment for close to RM10 million from Balfour Beatty, which scaled down its operation in Malaysia. This is why Lim claims Pestech is today the best-equipped local company for rail electrification.
Moving forward, Pestech also plans to develop its in-house brands, starting with its own high-voltage (HV) equipment. The company is building a plant in Bukit Beruntung, Selangor, for RM35 million to RM40 million. Upon completion in late 2016 or early 2017, the plant is expected to produce some 1,000 units of HV equipment a year.
“We will use it for our own substation projects. If the opportunity arises, we hope to sell it to other clients. This can support our growth in the next 5 to 10 years,” says Lim.
Currently, Pestech has an order book of about RM700 million, which should keep it busy for the next couple of years. The group has also tapped a business with recurring income with the procurement of its first independent power transmission concession in Cambodia.
Pestech’s tender book stands at around RM1 billion to RM1.2 billion now, excluding the upcoming rail electrification jobs for MRT2 and LRT3. Its success rate in tenders is about 20% to 30%.
Lim acknowledges that to support and nurture a developing business entity like Pestech, the market cap needs to expand in tandem with the pace of business growth. Although the company does not have a specific target, it desires a future market cap of about RM3 billion to RM4 billion.
“As a sizeable company, we could confidently compete against and stand tall amongst the other multinational competitors and subsequently become an internationally renowned brand name in power infrastructure in the industry,” Lim says.
Broadly, he believes there is a lot of potential in the region as the electrical infrastructure requirement of Asean members is estimated at about US$20 billion a year. “Each of these countries is on its own development path and thus has different demand for electricity. That gives us a stable business.”
For instance, Malaysia has an electrification rate of 97% to 99% compared with Myanmar’s 10%, says Lim.
Cambodia, which has an electrification rate of 20%, is targeting 100% by 2030 while Indonesia, which has not built any power infrastructure in the last decade, requires 35,000mw in the next 5 to 10 years.
“The electrification rate is a gauge for how advanced and modern a country is. When there is no power, there is no modernisation. The aim is to make a country better; that cannot be stopped. I don’t see Cambodia,
Myanmar and Laos going backwards,” Lim says.
Apart from Indochina, Pestech is bidding for projects in Sri Lanka, the Philippines, Indonesia and Thailand.
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.
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