Pekat Group Berhad - Site visit to EPE Switchgear
Tue, 21-Jan-2025 03:06 pm
by Tan Sue Wen • Apex Research

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PEKAT (0233)

Target Price (RM)

1.17

Recommendation

Hold

Summary

  • We recently visited PEKAT’s EPE Switchgear facility in Nilai, a specialist in manufacturing MV switchgear products. The facility is currently operating at 70% utilisation.

  • Demand for switchgear remains strong, driven by ongoing grid upgrades and riding onto the 8-10 year replacement cycle. Currently, EPE holds an unbilled order book of c.RM180m and a tender book >RM500m, with a historical win rate of 20%.

  • Following the recent share price rally, our recommendation has been revised to HOLD with an unchanged target price of RM1.17, based on a sum-of-parts (SOP) valuation, and appraised with a three-star ESG rating.

 

Company Update

  • EPE Switchgear. We recently visited PEKAT’s EPE Switchgear facility in Nilai, Negeri Sembilan. EPE is a leading manufacturer of switchgear products, specialising in Air-Insulated Switchgear (AIS), Gas-Insulated Switchgear (GIS), Ring Main Units (RMU), Remote Control Boxes (RCB), Load Break Switches (LBS), Feeder Pillars, Compact Substations, and Mobile Substations (refer to Figure 2), catering to the MV segment (1-44kV). The facility spans 145,500 sqf and boasts an annual production capacity of approximately 2,000 switchgear panels. Currently, EPE operates at 70% utilisation on a single shift. Note that, EPE is able to double its production volume with existing resources, but space constraints remain a challenge. In addition to manufacturing, EPE offers operation and maintenance services, as most of their equipment is designed for a 25-year lifespan. Regarding revenue mix, TNB, Sarawak Energy, and Sabah Electricity contribute up to 70%, the private sector accounts for 20%, and the remaining revenue comes from export markets such as Qatar, Oman, Australia, and Germany.

     

  • Our Take. We remain optimistic over EPE’s prospects, driven by the ongoing grid infrastructure upgrade and replacement cycles that occur every 8-10 years. Under RP4, the allowed capex has increased to RM26.6m, from RM20.6m in RP3. Historically, 30% of that capex has been allocated towards maintenance capex, with around 40% directed towards energy transition initiatives. The increase is reflected in TNB's latest tender cycle, where switchgear demand has nearly doubled. Given the high barriers to entry, with only 5-7 players in the market, we believe EPE is well-positioned in this field, supported by over 50 years of experience and a proven track record of execution. To stay ahead of the replacement cycle, EPE has partnered with TNB to innovate the Feeder Pillar, incorporating a smart monitoring system designed for both new developments and replacements in urban areas. The addressable market is estimated at 8-10k units annually. As of date, EPE holds an unbilled order book of c.RM180m, providing visibility for FY25-FY26F, and a tender book of up to RM500m, with historical win rates of about 20%.

     

  • Earnings revision. No change to our earnings forecasts.

     

  • Valuation & Recommendation. Following the recent share price rally, our recommendation has been revised to HOLD, with an unchanged target price of RM1.17, based based on a Sum-of-Parts (SOP) valuation and appraised with three-star ESG rating. We remain in favor of Pekat for its synergistic business modelstrong margins in the EPE segment, and sustainable order book. We also noted that Pekat’s strong historical financial results qualify the Group for the transfer to the Main Board of Bursa Malaysia. 

     

  • Risk. Heavy reliance on government initiatives. Inability to secure new contracts. Spike in raw material costs such as copper and steel.

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