Pekat Group 3QFY24 Performance Below Expectations

Pekat Group Berhad’s recent financial results for 3QFY24 reveal a mixed performance, falling below both analysts’ and market expectations. While revenue surged by 46.1% quarter-on-quarter (QoQ) to RM82.6 million, the company’s core net profit (CNP) declined sharply by 42.8% YoY to RM2.9 million, bringing the 9MFY24 CNP to RM11.8 million. This shortfall represents only 56.5% of in-house projections and 65.6% of consensus estimates, prompting a downward revision in earnings forecasts.

Key Factors Behind Underperformance

1. Higher Administrative Costs: A significant 72.6% jump in administrative expenses, primarily due to non-deductible items such as ESOS expenses and acquisition-related costs, eroded profitability.

2. Rising Effective Tax Rate: The higher tax burden, driven by these non-deductible expenses, further pressured net profit margins, which dropped to 3.5% compared to 5.2% a year earlier.

3. Core Business Margins: Despite an increase in project execution, particularly in the Solar segment (+64% QoQ), the focus on margin preservation and smaller-scale rooftop solar projects limited Pekat’s ability to scale profits.

Positive Developments and Growth Drivers

Despite these challenges, Pekat remains poised for long-term growth, supported by favorable industry dynamics:

1. Solar Industry Tailwinds: Falling solar module prices (USD 0.09/watt as of November 2024) and supportive policies like the NEM scheme and GITA rebates continue to stimulate investment in solar energy. Pekat’s niche in rooftop solar projects aligns well with this trend.

2. Robust Order Book: Pekat’s outstanding order book of RM360 million (1.6x FY23 revenue) includes RM115 million in CGPP projects, offering revenue visibility in the near term.

3. Strategic EPE Acquisition: The planned 60% acquisition of EPE Switchgear, expected to be finalized by December 2024, could enhance profitability in the higher-margin EPE segment.

4. Transition to Main Market: Pekat’s strong financial performance positions it for a transfer to the Main Board of Bursa Malaysia, signaling a step forward in its corporate maturity and appeal to institutional investors.

Pekat Group: Risks to Watch

The company faces several risks, including potential delays in the EPE acquisition, volatile solar module costs, and reliance on government initiatives. Additionally, market competition remains intense, which could pressure margins further.

Valuation and Outlook

Pekat’s Sum-of-Parts valuation was revised down to RM1.17 per share from RM1.30, reflecting adjustments for higher administrative costs and tax rates. However, the BUY recommendation remains, backed by Pekat’s synergistic business model, stable margins, and sustainable growth prospects in the solar and EPE segments.

Ongoing shift

While Pekat’s 3QFY24 performance fell short of expectations, the company is strategically positioned to benefit from the ongoing shift toward renewable energy. Investors should monitor its ability to navigate cost challenges and capitalize on the upcoming opportunities in Malaysia’s solar energy market.

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