Mestron’s rising stature in renewable energy: An investment beacon in the making?

RHB Research has today pegged a fair value of 80 sen on specialty pole maker Mestron Holdings Bhd, a move which created quite a stir in the financial corridors of Malaysia. This valuation – while commanding a premium – isn’t baseless.

Having started as an EPCC (engineering, procurement, construction, and commissioning) solar contractor in 2019, Mestron today stands as a notable contender in the country’s renewable energy (RE) landscape.

At 80 sen which is a 55% upside from its share price of 52 sen at the close of yesterday’s (Oct 5) trading, Mestron does offer a compelling narrative for investors looking for the next lucrative opportunity in RE.

Strategic Foray into RE

While their roots trace back to solar contracting, Mestron is now poised for RE leadership given its active involvement with the self-consumption (SelCo) and net energy metering (NEM) schemes orchestrated by the Sustainable Energy Development Authority (SEDA).

Serving distinct energy consumption and monetisation models, these schemes have seen Mestron delivering tailored solutions to its clientele, underscoring the group’s commitment to this domain.

Further testament to Mestron’s RE ambition is its RM3 mil acquisition of Liziz Biogas Sdn Bhd in September 2022. Beyond just diversification, the group has projected annual revenues nearing RM6 mil, accompanied by a substantial gross profit margin of over 70% from its move into biogas energy projects.

This combination has piqued industry interest and curiosity.

Main board listing: A game changer?

Mestron’s decision to transition its listing status from the Bursa Malaysia ACE Market to the Main Market uplistihas garnered attention. Such upgrading can potentially draw a broader investor demographic, augmenting the stock’s liquidity – a move keenly watched by institutional stakeholders.

From a financial lens, Mestron has shown resilience and growth. Holding a net cash position since FY2019 and with a 2Q FY2023 cash reserve nearing RM28.9 mil, the group’s financial health appears robust.

Mestron’s revenue and core earnings grew at a respectable CAGR of 18% and 63% for FY2019-FY2022 as well as a record 2Q FY2023 revenue of RM37.8 mil which further add to the group’s appeal.

With projected revenue and core earnings’ CAGRs of 20% and 32% spanning FY2022-FY2025, Mestron’s horizon looks promising. The company appears poised to benefit from the National Digital Network (JENDELA) and the impending 5G wave projects.

However, challenges persist. Fluctuating steel prices and looming inflationary concerns cast shadows of doubt in that it is engaged in the provision of 5G infrastructure, namely telco towers. But with contract structures possibly cushioning against these potential volatilities, Mestron seems geared to navigate these challenges.

A premium worth paying?

Returning to RHB Research’s valuation, the 80 sen price tag – set at 27 times FY2024 EV/EBITDA – leads to inevitable comparisons with industry peers.

But considering Mestron’s leading role in the lighting pole sector and a forecasted core earnings CAGR that is hard to rival, many market insiders do vouch for its justification.

To sum it up, Mestron with its RE ambition and strong financial position has emerged as a prospect hard to overlook for discerning investors. Could it serve as the guiding light for Malaysia’s RE sector? The next few quarters might just hold the answer.

At 2.45pm, Mestron was up 1.5 en or 2,91% to 53.5 sen with 15.71 million shares traded, thus valuing the company at RM528 mil. – Oct 6, 2023

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