Results

• Pesona reported 1QFY17 results with revenue of RM160.5m (+52% QoQ, +61% YoY) and earnings of RM6m (+37% QoQ, -3% YoY).

Deviation

• 1Q earnings made up 19% of our full year forecast which we deem to be within expectations as momentum should accelerate in the coming quarters.

Dividends

• None declared for the quarter.

Highlights

• Digesting the results. We are not concerned by the flattish earnings in 1Q (-3% YoY) as other income was exceptionally high in the same period last year (RM7.9m) due to interest earned on receivables for the UNIMAP project. More importantly, is the strong earnings momentum QoQ (+37%) driven by the execution of its sizable orderbook of RM1.9bn (5x cover on FY16 construction revenue).

• 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.

• Acquisition delayed to 3Q. The acquisition of SEP (eventual concessionaire of the UNIMAP hostel) has been delayed from 1Q to 3Q 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

• Although the results were within expectations we cut our FY17-18 earnings forecast by 3% and 14% to reflect delays in the acquisition of SEP.

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 (3 year CAGR: 35%) and increasing ROE (20%).

Valuation

• The earnings cut is offset by rolling over our valuation horizon from mid-FY18 to FY18, leaving our TP unchanged at RM0.81. This implies FY17-18 P/E of 17.8x and 13x 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 - 24 May 2017