Highlights

• Meeting with management. We recently met up with the management of Pesona which was represented by its CFO, Mr Chong Kien Eng to gather some updates post FY16 results. To recap, Pesona registered a strong set of earnings for FY16 at RM20m, growing +71% YoY.

• Focusing on execution. Pesona’s orderbook stands at RM2.1bn, translating to a strong cover ratio of 5.4x on FY16 construction revenue. Management guides that execution on all of its jobs is on track. Work has commenced for all of the contracts secured in 2H16, namely Central Plaza Mall (RM488m), Eaton Residence (RM402m) and West Coast Expressway from Kapar to Asam Jawa (RM371m).

• Job wins to pick up. Following a quiet 1Q17 for job wins, management expects this to pick up soon enough and is confident to achieve RM500m for the year. In the near term, Pesona is in the running for a hospital job (RM100m). It is also finalising a tender for a building job (RM300-400m) and some road works.

• Tapping on affordable housing. Pesona is expected to undertake an affordable housing project via the PPA1M scheme. The project site is located in Cheras (to be provided by government) with GDV of RM280-300m. Under the scheme, 55% of the units will be allocated to civil servants (RM150psf) while the balance 45% will be open for public sale (capped at RM500psf). Judging from previous PPA1M developments within Klang Valley, the portion for civil servants is usually fully taken up.

• Minor acquisition setback. The acquisition of SEP (eventual concessionaire of the UNIMAP hostel) has been delayed slightly from 1Q to mid-2017 due to delays in obtaining the Certificate of Acceptance (CoA). Management expects this to be resolved soon as (i) all the necessary defect works have been fixed and (ii) students have been occupying the hostel since 4Q16.

Risks

• Delays in the acquisition of SEP.

Forecasts

• Our forecasts are unchanged. However, we reckon there could be a potential upside as we have yet to factor the PPA1M project into our earnings forecasts.

Rating

Maintain BUY, TP: RM0.81

• Pesona offers investors exposure to a pure construction play with an incoming stream of recurring earnings. Its financials are solid with strong earnings growth, increasing ROE and net cash positon.

Valuation

• Our SOP based TP of RM0.81 implies FY17-18 P/E of 16.9x and 10.9x which we reckon is fair for a pure construction play in an earnings upcycle with concession exposure.

• The impending issuance of 39.5m shares at RM0.70/share (to acquire SEP) should set a new minimum benchmark valuation for the stock.

Source: Hong Leong Investment Bank Research - 12 Apr 2017