SMRT offers IoT solutions to the likes of TNB, reducing power outage durations through real-time monitoring. Having also penetrated Indonesia's energy sector, SMRT aims to extend its expertise to the water industry. After its corporate restructuring, SMRT has shed a loss-making education business and will be fully reflecting earnings from its growing lucrative IoT business. Trading at an attractive CY24F PER of 14.6x, it offers a 30% upside with a potential FV of RM1.25.

Riding on TNB's digitalisation efforts. Following a comprehensive restructuring (see Exhibit 2), which included the full acquisition of the remaining 36% stake in N’osairis Technology Solutions Sdn Bhd (NTS) and divestment of its 100% stake in SMR Education Sdn Bhd in May 2023, SMRT has repositioned as an Internet of Things (IoT) expert. Building on its expertise in managing ATMs for financial institutions, NTS has expanded into the energy segment, particularly servicing TNB's distribution substations. By implementing IoT devices, TNB can replace the traditional time-consuming reactive response during power outages with preventive measures via real-time remote monitoring. This has brought about a reduction in the system average interruption duration index (SAIDI) by 17.5% over the past 5 years, ultimately reducing the duration of power outages. Note that SAIDI includes TNB’s >96k substations where SMRT’s IoT-enabled substations account for <20k and is expected to continue growing, underpinned by TNB’s smart grid initiative to enable distribution automation (DA) systems.

Duplicating its success overseas. In Sep 2022, SMRT hit a new milestone by successfully penetrating Indonesia’s energy sector via Perusahaan Listrik Negara (PLN). The group was tasked with the digitalisation of c.500 substations in Indonesia that has >542k substations, 5x more than TNB. This means ample room for growth as Indonesia currently only accounts for 8.3% of the group’s CY22 revenue.

Targeting non-revenue water. Leveraging its scalability and highly adaptive business nature, SMRT is extending its expertise to the water industry in an attempt to digitalise water treatment plants and reservoirs, aiming to minimise water wastages. The group is currently engaging with a few interested parties in the pilot stage and anticipates to secure its first client by FY24.

All eyes on its fresh start. After its restructuring and kitchen sinking exercise which concluded in 6QFY23, SMRT’s books are now free of legacy businesses. We believe anticipation is high in the market as the company reports its initial quarterly results on this clean slate at the end of November 2023.

30% upside with potential fair value of RM1.25 pegged to a modest CY24F PER of 19x, inline with its local counterparts. We believe our valuation is undemanding given the group’s unique exposure to a robust secular growth trend.

Risks include unforeseen TNB job cancellations, challenges in water business expansion, and prolonged regulatory procedures, posing possible delays in revenue recognition.

Source: Kenanga Research - 28 Nov 2023