Pekat Group Berhad - Marking footprint into power systems segment
Fri, 02-Aug-2024 08:11 am
by Tan Sue Wen • Apex Research

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PEKAT (0233)

Target Price (RM)

1.2

Recommendation

Buy

  • Acquisition details. Pekat entered into a Sales and Purchase Agreement (SPA) with Apex Power Industry to acquire a 60.0% stake in EPE Switchgear. The acquisition comes with an Aggregated Profit Guarantee of RM48.0m over three financial years, targeted to record RM16.0m/annum. The acquisition, valued at RM96.0m, will be funded via c.RM65.0m through external borrowings, with the remainder sourced internally. We deem the acquisition price tag fair, based on a BV of 0.92x, with EPE reporting a three-year CAGR of 24.0% in net profit, reaching RM14.8m in FY23. The acquisition is expected to be completed by the end of Nov 2024, on the back of the 90-day SSA condition.

  • EPE Switchgear. EPE Switchgear is one of Malaysia’s largest manufacturers of medium voltage (MV) electrical switchgear, commanding c.30.0% market share. EPE has a well-established customers portfolio including local and overseas clients, notably appointed as one of the handful vendors of MV switchgear and transformers by TNB. Based on 7MFY24, EPE generated RM14.9m in PAT and enjoys a margin of 15.9%.

  • Power distribution equipment landscape. To achieve the nation’s goal of 70.0% renewable energy capacity by 2050 under the Net Energy Transition Roadmap (NETR), Malaysia is required to invest RM420.0bn from 2023 to 2050 to upgrade its grid infrastructure. Of this amount, 52.4% will be allocated for distribution, 28.6% for transmission, and the rest for battery energy storage systems. TNB has announced plans to invest an additional RM35.0bn between 2025 and 2030 to future-proof the power grid, on top of RM54.0bn allocated for other grid investments over the same period. This brings TNB’s total investment in Malaysia’s national grid to RM90.0bn over five years. Capital expenditure in the power grid will create a significant demand for power distribution equipment, directly benefiting the demand for switchgear from EPE Switchgear.

  • DCs Landscape. Data Centers (DCs) industry growth is expected to be robust, projected at six-year CAGR of 14.0%, reaching US$3.97bn by 2029. Future growth will be supported by (i) Malaysia's central location within ASEAN, (ii) strong fibre connectivity, and (iii) affordable land prices compared to neighbouring Singapore. Major FDIs from global tech giants, including Microsoft (RM10.0bn), Google (RM9.0bn), and ByteDance (proposed RM10.0bn), with further DC investments likely to be phased in over the coming years are expected to drive demand.

  • DC cost breakdown. Based on channel checks, cost of constructing a DC in Malaysia is broken down by c.45.0% to power systems, 30.0% to cooling systems, and the remaining portion to other components. This allocation can vary depending onto the number of racks installed; more racks increase the proportion for other components and vice versa. Among power systems, UPS and generators account for about half of the expenditure, while c.25.0% is dedicated to switchgear. The number of switchgear units required depends on the designed power density —higher power density requires more switchgear.

  • Our views. We opine that EPE Switchgear is well positioned (i) being one of the handful of vendors and manufacturers appointed by TNB, (ii) having a solid track record with over five decades of market presence, (iii) maintaining high-standard quality backed by various government registrations and certifications, and (iv) capability to undertake and complete projects in a timely manner in order to capitalise onto the upgrading grid trend and DCs, which indirectly creates a sustainable demand for MV switchgear.

  • Valuation. We are revising our FY24F/FY25F earnings projections taking into account of the acquisition details. We trimmed our FY24F core net profit forecast by 7.2% to RM19.4m, as the acquisition took longer-than-anticipated for completion. We expect the full contribution to be reflected in FY25F, bringing the Group’s revenue to a new high, surpassing RM500.0m, while core net profit is forecasted at RM29.0m.

  • We believe valuations at current price is still undemanding. We reiterate our BUY recommendation on Pekat with a revised target price from RM1.14 to RM1.20, based on a sum-of-parts (SOP) valuation.

  • We favour Pekat for its i) synergistic business model with the ELP and Trading segments consistently delivering topline of c.RM30.0m each, ii) attractive in-house solar financing business, catering to residential and C&I solar adoption, iii) lucrative margins from the EPE, benefiting from long-term grid upgrades and DCs trends iv) consistently maintaining order book at RM200.0m level, with an emphasis on fast-track projects, v) strong fundamentals equipped with healthy balance sheet post-acquisition of EPE as we project net gearing to stay below 0.6x, and vi) long-term RE industry growth potential from the rollout of NETR.

  • Risks. (i) Acquisition taking-longer-than-expected, (ii) failing to fulfil the conditions of the SSA (iii) reversal of solar module prices and (iv) intense market competition.
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