• HLIB institutional research has a BUY rating with SOP TP of RM0.81, or 22% upside. Pesona offers investors exposure to a pure construction play with an incoming stream of recurring earnings. Its orderbook stands at a record RM2.1bn, translating to a 5.4x cover on FY16 construction revenue, supported by robust earnings growth (FY16-18 earnings CAGR of 55%) and increasing ROE (improving from 14.3% in FY16 to 26.2% in FY18).

• Established clientele base. All of Pesona’s existing jobs are either government related or from listed property developers in Singapore, Malaysia and Thailand. With 75% of its orderbook comprising of newly secured jobs this year, risk of cost overruns is minimal.

• Incoming concession. Pesona will soon conclude the acquisition of SEP (issuance of 39.5m shares at RM0.70/share), the eventual concessionaire of the completed UNIMAP hostel. As concessionaire, SEP will earn from rental and maintenance totalling RM33m p.a. with potential profit of ~RM12m for FY17-18.

• SKIP to the next catalyst. On the other hand, there has been talk that Pesona could emerge as one of the concessionaire partners for the proposed SKIP expressway. At a cost of RM2.1bn, Pesona’s stake would provide RM630m worth of work to undertake, boosting its order book by 29%. Upon completing the highway, this would provide another avenue of recurring income to Pesona via tolling.

• Pending a flag breakout. Share prices surged from a 52-week low of RM0.33 (23 June 2016) to a high of RM0.715 (15 Feb 2017) before consolidating sideways to end at RM0.665 yesterday, forming a series of higher highs and higher lows. Although Pesona may encounter some sideways consolidation near downtrend resistance at RM0.685, we expect an eventual breakout above this level to continue its previous uptrend. As shown in the monthly chart, Pesona has formed two major rounding bottom patterns since 2010. Such beautiful formation and bullish technicals are expected to spur share prices to surpass 52-week high of RM0.715 in the short term.

• Hence, a decisive flag breakout above RM0.685, in our view, could form a new upswing towards RM0.715 (50% FR) and eventually testing our LT objective at RM0.81 (flag breakout objective). On the flip side, key supports are situated at RM0.635 (38.2% FR) and RM0.60 (50% FR). Cut loss at RM0.595.

• A cheaper trading exposure is through PESONA-WC (Expiry: 27 Jan 2020; Discount: 2.3%; Gearing: 1.66x)

Source: Hong Leong Investment Bank Research - 21 Mar 2017