Solar EPCC player Pekat Group Berhad (Pekat) is planning to acquire a stake in EPE Switchgear (M) Sdn Bhd, a switchgear manufacturer based in Nilai.
Pekat Teknologi Sdn Bhd, a wholly owned subsidiary of Pekat, inked a memorandum of understanding (MoU) with EPE’s sole shareholder Apex Power Industry Sdn Bhd yesterday to negotiate exclusively on the potential acquisition until 30th June 2024, or a mutually agreed later date.
MIDF Research said today (May 8) that the move synergises well with Pekat. The stake that Pekat plans to acquire, and the purchase consideration will be determined later pending negotiations and a due diligence review.
MIDF views the proposed acquisition as one that will synergise well with Pekat’s business as products manufactured by EPE such as switchgears and distribution transformers are crucial components in the solar photovoltaic (PV) systems offered by those in the EPCC space such as Pekat.
MIDF believes the acquisition will position Pekat favourably to ride on the expected improvement in demand over the long term that will be catalysed by the growing solar industry that is backed by conducive government policies and the substantial capex for projects involving energy transition, especially on the upgrading of grid infrastructure.
Order books remain strong. Pekat’s outstanding order book stands at RM180m, comprising mainly rooftop solar projects. It is also aiming to secure about RM200m worth of Corporate Green Power Programme (CGPP) related EPCC projects, of which we expect announcements to be around the corner.
Recall that all solar power plants under the CGPP have to be completed no later than 2025, unless otherwise approved by the Energy Commission. Recall that Pekat had also secured its own CGPP quota of 29.99MWac last year.
Its plant will be built in Tronoh, Perak. Future order book replenishment prospects will come from LSS5-related EPCC jobs. The program was launched for bidding last month.
Earnings preview. Pekat is expected to release its 1QFY24 results on 28 May 2024, and MIDF believes the performance will likely be on par with 4QFY23 when the group reported a quarterly revenue of RM58.4m and a core net profit of RM3.4m.
MIDF has projected a FY24 revenue of RM234.4m and a core net profit of RM17.4m, which will mainly be driven by commercial and industrial (C&I) and residential rooftop solar jobs.
MIDF revised their FY25F earnings estimates slightly higher by +6.0% to RM22.5m on the back of management’s more optimistic outlook on rooftop solar.
Data centre opportunities. While Pekat has yet to be involved in the provision of solar PV solution for data centres, it is a direction that the management is looking forward to. It is no stranger to data centre-related jobs, having worked on earthing and lightning protection (ELP) solutions for data centres by Bridge and Keppel. It is currently constructing the ELP systems for facilities by Yondr and AirTrunk. Management is positive on prospects, backed by the mushrooming of data centres.
Target price. MIDF has upgraded their target price for Pekat to RM0.88 from RM0.68 by rolling forward their valuation.
Maintain BUY. Pekat’s share price has gained much traction, rising +62.8% year-to-date to a two-year high of 70 sen as of yesterday. Since Apr-24, MIDF observed strong net buying activities by foreign investors and local institutions, purchasing RM9.0m and RM6.1m net, respectively.
MIDF believes some further upside is justifiable for Pekat and the solar EPCC subsector, being the beneficiaries of the government’s renewable energy initiatives.
MIDF estimates Pekat’s net cash position to be RM26.1m, which remains accommodative to fund further growth and investments. It is also in the process of disposing of its vacant industrial land in Shah Alam, which will further add about RM19.6m to its coffers.
