PEKAT, a solar photovoltaic (PV) system contractor, stands to gain from the government’s commitment towards renewable energy (RE) making up 70% of total generation capacity mix by 2050. The demand for its earthing and lightning protection (ELP) systems is growing, backed by booming data centre and public infrastructure projects. We value the company at RM0.88 based on SoP. We recommend ADD.

A new wave of solar EPCC jobs. We foresee a new wave of solar EPCC jobs in the market in coming months underpinned by: (i) the 800MW Corporate Green Power Programme (CGPP) with an end- 2025 completion deadline, (ii) the 2GW Large Scale Solar 5 (LSS5), the largest amongst the five LSS programmes, which also allows developers to bid up to 500MW (vs. only 50MW previously) with commencement scheduled in 2026, (iii) an additional quota of 400MW (residential: 100MW; commercial: 300MW) from Feb to Dec 2024 under the Net Energy Metering (NEM) initiative, and (iv) the Solar For Rakyat Incentive Scheme (solaRIS) (using the additional 100W NEM quota for the residential segment) where participants will be offered rebates ranging from RM1,000/kWac up to RM4,000. Based on our estimates, the CGPP and LSS5 will translate to at least RM2.4b and RM5b, respectively, in terms of solar EPCC contract value.

Plenty of opportunities in rooftop solar. PEKAT, a seasoned solar EPCC contractor in the residential segment via its subsidiary Solaroo, is expanding its presence in the retail and smaller commercial and industrial space (i.e. SMEs, shop lots and factories). There is still ample of room for growth in the retail segment given that only about 30k of TENAGA’s (MP; TP: RM11.50) 9.6m retail customers have installed rooftop solar panels thus far. Similarly, investment in solar installation by businesses is rising driven by commercial reasons (i.e. to save cost) and ESG considerations following the recent hikes in electricity tariffs. We estimate that solar EPCC contracting contributes to >50% of its total profits.

Market leader in ELP systems. PEKAT is the market leader in ELP systems locally with >50% market share. Its ELP unit is poised to benefit from increased orders on the roll-out of mega public infrastructure projects including MRT3, Bayan Lepas LRT, RTS, ECRL, HSR, Kuching BRT, and new data centre projects. It provided ELP systems to several high-profile projects such as MRT projects, LRT projects, Merdeka 118 and Exchange 106, as well as data centres (i.e. Keppel, CJ2 and Nusanjaya). We estimate that ELP systems make up <50% of its total earnings.

Venturing into switchgears. PEKAT is acquiring a stake in medium voltage electrical switchgear maker EPE Switchgear (M) Sdn Bhd (EPE). Used predominantly in the power sector, the demand for EPE's products is poised to increase on the back of TENAGA’s investment of ~RM7b annually in upgrading the local power grid.

Forecasts. We project its FY24-25F earnings to grow at 27% and 33%, respectively, driven by: (i) its outstanding EPCC order book of RM185m that will keep it busy for two years, (ii) EPCC project opportunities amounting to at least 70MWp through CGPP, and (iii) a growing demand for ELP systems on the local construction boom and massive investment in data centres.

Valuations and recommendation. We value PEKAT at RM0.88 based on SoP valuation (Exhibit 1), valuing: (i) its EPCC segment at 30x FY25F PER, in-line with average historical 1-year forward PER of the solar EPCC sector, (ii) its ELP segment at 10x FY25F PER, at a discount to 18x to mid-sized to large contractors given PEKAT’s much smaller size, and (iii) its CGPP assets by discounted cash flow. There is no adjustment to our fair value based on ESG given a 3-star rating as appraised by us (see Page 3). We recommend ADD.

Source: Kenanga Research - 21 May 2024