AS a manufacturer of poles and towers, Mestron Holdings Bhd stands to benefit from government spending on telecommunications infrastructure under the Jaringan Digital Negara (Jendela) and 5G programmes.
The government has committed to spending RM4.6 billion under the Jendela programme to develop 4G infrastructure and network in rural areas, to increase the network’s coverage and the average download speed to 35Mbps, from 25Mbps currently.
Under the Jendela programme, the government plans for the development of 1,661 telecommunication towers that will provide 4G connectivity to those living in rural areas and the interior regions.
And according to the fourth Jendela quarterly report, 1,024 towers have been built between September 2020 and September 2021. This means 637 towers are still under construction or are to be built.
While Mestron is not a network facilities provider (NFP) that participated in the tender called by the Malaysian Communication and Multimedia Commission (MCMC) for the Jendela programme, as a pole and tower manufacturer, the group stands to benefit from the programme.
“We have been doing telecommunications monopoles since around seven years ago, when the government did the 1BestariNet programme. This gives us the capacity and capability to do telco poles and towers,” says Mestron group managing director Por Teong Eng.
In a virtual interview with The Edge, Por says Mestron aims to manufacture 300 of the remaining towers to be built under the Jendela programme. The cost to develop a telco tower in a rural area of Sabah and Sarawak, for example, at the NFP level, is between RM1 million and RM1.6 million, he says.
From these projects, Mestron would earn about RM45 million in revenue, says Por, and at an average 20% margin — depending on material prices — the group stands to make about RM9 million from the orders.
If Mestron can secure the orders for 300 towers under the Jendela programme, its revenue and profitability stand to be boosted this year. It has the capacity to produce 8,000 tonnes of poles and towers annually.
In the financial year ended Dec 31, 2020 (FY2020), Mestron registered a net profit of RM6.14 million on revenue of RM56.64 million. In the nine-month period ended Sept 30, 2021 (9MFY2021), the group made a net profit of RM2.65 million, down 31.5% year on year.
Profitability declined in 2021 because the group was unable to operate at full capacity during the Movement Control Orders (MCOs), says Por. He concedes that it is unlikely that Mestron will achieve or beat its FY2020 profit level in FY2021.
He is confident, however, that the group’s FY2022 profit will be significantly higher than that of FY2021, owing to the low base effect as well as the implementation of the Jendela and 5G programmes.
While the Jendela programme is in full swing, however, the 5G nationwide rollout is still in limbo, with the government undertaking a review of the single wholesale network (SWN) model, whereby Digital Nasional Bhd (DNB) owns the 5G network.
The country’s Big 4 telcos are said to be proposing the launch of another wholesale network provider, which they will own and operate under a dual wholesale network (DWN) model, alongside the one owned by the Ministry of Finance Inc-owned DNB.
Nevertheless, as a manufacturer of poles and towers, Mestron stands to benefit from either the SWN or DWN model, or even if the government decides to return to the traditional spectrum allocation model.
“I believe the government will continue with the SWN model through DNB, as money has been either spent or raised by both DNB as well as the technology partner Ericsson. Either way, we stand to benefit from the 5G network,” says Por.
To recap, DNB secured a RM400 million working capital financing package from Deutsche Bank last November. The amount is part of the estimated RM5 billion total working capital facilities that DNB will require to roll out the planned 5G network.
Meanwhile, last October, United Overseas Bank (M) Bhd provided Ericsson (M) Sdn Bhd with RM800 million in financing in the form of a receivables purchase agreement (RPA). According to DNB, UOB Malaysia has also been mandated as the lead arranger for an additional RM2.3 billion syndicated RPA for potential financial institutions.
DNB plans to establish a RM5 billion sukuk programme this year, which is intended to replace the working capital facilities and facilitate repayment of the RPA, the company says on its website.
It adds that the entire 5G network rollout is expected to cost RM16.5 billion over 10 years, comprising RM12.5 billion for the network equipment and infrastructure and RM4 billion in corporate costs.
Infrastructure development will cost RM8.5 billion over 10 years, of which RM4 billion will go to site owners and tower infrastructure companies.
Apart from the Jendela and 5G towers, Mestron continues to produce and supply standard streetlight and decorative streetlight poles. This segment is the group’s bread-and-butter business and, with rapid urbanisation, more lighting poles will be needed, says Por.
Meanwhile, Mestron is diversifying the application of its poles to the smart metering programme for electricity, under Tenaga Nasional Bhd. The smart metering system requires that a communications monopole be installed for the substation and meters to communicate.
Building up a recurring income portfolio
Mestron is also currently building up businesses that will provide the group with long-term recurring income. For starters, the group has already completed a 2mw biogas power plant in Gua Musang, Kelantan, which will start supplying power to Tenaga in the second quarter of this year.
“We have already signed a power purchase agreement with Tenaga for 21 years at a rate of 39 sen plus per kWh. The projected revenue per year from this plant is about RM6 million plus,” says Por, adding that the renewable energy (RE) power plant is projected to have 60% pre-tax margins.
The aim is for Mestron to have power generation capacity of 10mw through RE power plants within five years, says Por. The Gua Musang biogas plant, using biomass from nearby crude palm oil mills as feedstock, is expandable to 3.2mw, he says.
Asked whether the RE venture will require a lot of investment, Por says it is only capital expenditure-heavy in the early stage, and that the group will continue to be disciplined and cautious when it comes to investing in new assets or businesses.
“The average cost of developing a 1mw renewable energy power plant is RM9 million, so it will not be a huge burden on our balance sheet.”
Mestron is also involved in solar power installations by providing financing for its clients that want to install solar panels at their premises, says Por. The group will then share the profit that could be derived from the installation, he says.
The group is in a healthy financial position, with net cash of RM29.8 million as at Sept 30, 2021, while short-and long-term borrowings stood at just RM189,000 and RM4.28 million respectively.
Mestron, which debuted on the Ace Market in June 2019, has lofty valuations compared with a similar company. It is trading at a price-earnings ratio (PER) of 84.5 times, based on annualised earnings per share (EPS) of 0.373 sen (based on 9MFY2021 EPS) and last Thursday’s price of 31.5 sen per share.
Its closest competitor, Lysaght Galvanized Steel Bhd, was trading at a PER of 23 times, based on its share price of RM1.89 last Thursday and annualised 9MFY2021 EPS.
At Thursday’s close of 31.5 sen, Mestron is valued at RM293.1 million.