Pestech International - Small but beautiful

INVESTMENT MERIT

- Good values to offer. An under-researched stock partly due to it being newly listed on Bursa just in May 2012, PESTECH actually has much to offer in this difficult time when good value stocks are hard to find. Its valuation is fairly attractive, trading at just 5x PER with a 6% net yield. In addition, its earnings are resilient with an international exposure.

- Huge market in the region. PESTECH is a home-grown integrated electric power technology company but has also expanded into overseas markets. There are market opportunities locally for PESTECH such as SCORE in Sarawak and RAPID in Pengerang, Johor. Opportunities for its key offshore operations are huge as well, mainly in Indochina, as the electricity supply currently in these countries does not meet the basic demands.

- Profit margin expansion. Currently, its order book stands at RM235m. It has a tender book of RM880m with a potential winning rate of 20%. It has reported improvement in its profit margin over the years as it took on more turkey projects, which came with higher margins as opposed to previously when it sub-contracts them out to third parties, hence only enjoyed lower profit margins. As a fact, its gross margin has improved from 13.5% in FY09 to 28.9% in FY12.

- Trading Buy at RM1.42. We are projecting a 22% hike in FY13 earnings to RM20.3m with a NDPS of 7 sen, based on a 30% payout. We value the stock at RM1.42/share @ 6.0x FY13 PER, which is fairly conservative as the FBMKLCI small cap is trading at 7.4x PER and Tenaga and YTL Power are trading at 9x-11x PERs.

SWOT ANALYSIS

- Strength: Strong technical expertise and experienced management personnel.

- Weaknesses: Dependent on a few specific third manufacturers to supply components.

- Opportunities: Expanding its overseas presence to new markets such as Loas, Myanmar and Vietnam as these countries currently have increasing electricity demand.

- Threats: Changes in economic, political and regulatory conditions will affect the company as its earnings are highly correlated to the global economic conditions.

TECHNICALS

- Resistance: RM1.20 (R1), RM1.25 (R2)

•Support: RM1.11 (S1), RM1.00 (S2)

•Comments: Following the commendable 4Q12 results that were released on Friday, PESTECH’s share price has broken out of an “Ascending Triangle” chart pattern. We believe the bulish move is a precursor to further gains ahead, and expect the bullish momentum to carry the share price higher.

BUSINESS OVERVIEW

Established as an electrical trading company in 1991, the group has grown into an integrated electric power technology company with an international presence. The group has been growing its overseas market business progressively since 2007. Its has since won contracts for both products and projects in Papua New Guinea, Tazania, Sri Lanka, Ghana and Cambodia. PESTECH was listed on Bursa in May 2012.

CORE BUSINESS SEGMENTS

- System design. The company is involved in the design and construction of electrical power transmission lines and underground cables connections for electricity transmission and distribution in the local and internat ional market.

- Engineering. The company services encompass High Voltage and Extra High Voltage substation engineering, control and protection to serve the needs of modern power companies and industrial plants

- Infrastructure provider. The company manufactures its own communication, protection and control products for use in its own projects as well as to be sold as finished products.

Source: Kenanga