Date: 14 October 2024
Broker: UOB Kay Hian
Company Overview
Pekat Group Berhad (Pekat MK) is an established solar photovoltaic (PV) and earthing & lightning protection (ELP) solutions provider based in Malaysia. The company primarily operates in the industrial sector, with a market capitalization of RM605.9 million (approximately US$140.5 million). Pekat is listed under the Bloomberg ticker “Pekat MK” and has 645.0 million shares issued.
Financial Highlights
- Share Price: RM0.94
- Target Price: RM1.15 (Upside: +23.0%)
- 52-week High/Low: RM0.395/RM1.06
- Major Shareholders: Chin Soo Mau (34.9%) and Tai Yee Chee (9.7%)
- FY23 NAV/Share: RM0.39
- FY24 Net Debt/Share: Net Cash
Price Performance (YTD)
- 1 Month: +5.1%
- 3 Months: -4.6%
- 6 Months: +88.9%
- 1 Year: +114.4%
- Year-to-Date (YTD): +117.4%
Robust Growth and Bright Prospects
Pekat Group is experiencing strong growth, driven by a robust orderbook that is expected to fuel medium-term earnings growth. The company has a projected three-year earnings Compound Annual Growth Rate (CAGR) of 36%, bolstered by the consolidation of EPE Switchgear and rising demand in the data centre and solar industries.
Management expects a minimum three-year top-line CAGR of 20%, backed by its RM270 million orderbook year-to-date. Key factors driving this growth include:
- High demand for earthing and lightning protection (ELP) systems in data centres.
- Benefits from a stronger Malaysian ringgit, though somewhat offset by higher copper and aluminum prices.
- The consolidation of a 60% stake in EPE Switchgear is slated for December 2024 and is expected to positively impact 2025’s revenue and net profit.
Outlook for 2H24
Pekat is positioned to record stronger top-line and bottom-line growth in 2H24, with key contributing factors being:
- A higher orderbook in both the solar and ELP segments.
- The stronger ringgit leading to slight cost savings in sales, albeit with higher aluminum and copper prices.
- An expanding ELP segment and good cost discipline.
The solar segment, which accounts for 60% of the group’s revenue, saw a 4% year-on-year decline in 1H24 due to delays in engineering, procurement, and installation projects. However, momentum is expected to improve in 2H24.
Earthing & Lightning Protection (ELP) Segment
Pekat’s ELP division, which contributes 18% of group revenue, has witnessed robust orderbook replenishment driven by the mushrooming of data centres across Malaysia. The company received approximately RM50 million in ELP orders from various data centres, including notable projects for Elmina and Microsoft. In 1H24, the ELP segment recorded a 27% year-on-year revenue growth, with expectations of continued strong momentum into 2025.
EPE Switchgear Acquisition
The acquisition of EPE Switchgear, expected to be completed by December 2024, is a strategic move for Pekat. EPE Switchgear commands a 30% market share in Peninsular Malaysia’s switchgear business and will diversify Pekat’s existing operations to include the power distribution equipment business. This acquisition comes with a profit guarantee of RM16 million annually and is expected to increase Pekat’s 2025 net profit by 20%.
EPE Switchgear operates within the power generation, transmission, and distribution sectors, and the acquisition will allow Pekat to capitalize on the growing demand for power distribution equipment, driven by:
- The adoption of renewable energy sources.
- Maintenance and upgrades to power distribution systems.
- The expansion of data centres.
- The rise of electric vehicles (EVs).
Financial Forecasts
Revenue (RM million):
- 2023: 227.5
- 2024F: 278.5
- 2025F: 444.2
- 2026F: 517.5
Net Profit (RM million):
- 2023: 13.7
- 2024F: 16.7
- 2025F: 30.1
- 2026F: 39.2
Earnings Per Share (EPS):
- 2023: 2.2 sen
- 2024F: 2.6 sen
- 2025F: 4.7 sen
- 2026F: 6.1 sen
Valuation Metrics:
- 2024 Price-to-Earnings (PE): 36.2x
- 2025 PE: 20.0x
- 2026 PE: 15.4x
ESG Commitments
Environmental:
Pekat has shown a strong commitment to sustainability. In 2023, it installed solar PV systems with a cumulative capacity of 150.6MWp, which helped reduce 155,822 tonnes of carbon dioxide emissions. Additionally, energy-saving measures such as motion sensor lights and energy-efficient LED lighting have been implemented within the company’s offices.
Social:
Pekat is dedicated to workforce diversity, employing 245 individuals from various backgrounds as of FY23. The company’s workforce is comprised of 71% male and 29% female staff members.
Governance:
Pekat’s board consists of six members, including two women (33%). The board includes four Independent Directors and two Non-independent Directors, with the Group Chief Executive Officer (GCEO) among them.
Conclusion
Pekat Group is poised for significant growth, supported by a robust orderbook, strategic acquisitions, and strong demand in the renewable energy and data centre sectors. The consolidation of EPE Switchgear, alongside the company’s continued focus on sustainability and innovation, positions it well for long-term success.
