Results

• Pesona reported 2QFY17 results with revenue of RM181m (+13% QoQ, +114% YoY) and earnings of RM6.1m (+1% QoQ, +8% YoY). This brings cumulative 1H revenue to RM341.5m (+85% YoY) with earnings at RM12.1m (+3% YoY).

Deviation

• 1H earnings formed 40% of our full year forecast which we regard to be slightly below expectations. Although 1H revenue surged 85% YoY, this was slightly less than what we had anticipated.

Dividends

• None declared for the quarter.

Highlights

• Digesting the results. We are not perturbed by the flattish earnings in 1H (+3% YoY) as other income was exceptionally high in the same period last year (RM10m) due to interest earned on receivables for the UNIMAP project. Earnings momentum is expected to be stronger in 2H as execution on its orderbook gains further traction, particularly on those jobs that it secured in 4Q last year.
• Slow job wins but orderbook still sizable . Job wins have been slow for Pesona this year with nothing secured YTD. Management said that it lost out on 2 building jobs where it was one of the frontrunners. Nonetheless, its orderbook remains healthy at RM1.7bn, translating to a cover of 4.5x on FY16 construction revenue.
• SEP acquisition may be concluded soon. We gather that Pesona may soon be concluding the acquisition of SEP (concessionaire for UNIMAP hostel). The key milestone is that Pesona recorded its maiden maintenance revenue from the hostel in 2Q amounting to RM5.1m. PBT margin on the maintenance was high at 76%. Upon acquiring SEP, Pesona will be able to recognise fixed annuity payments amounting to RM28m annually.

Risks

• Delays in the acquisition of SEP.

Forecasts

• We cut FY17-19 earnings by 10%, 7% and 9% respectively as we scale back orderbook recognition and lower new job wins for this year from RM500m to RM250m. Rating Maintain BUY, TP: RM0.76
• 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 (18%).

Valuation

• With the earnings cut, our SOP based TP is reduced from RM0.81 to RM0.76. This implies FY18 P/E of 13.2x 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 provide a rerating impetus for the stock.

Source: Hong Leong Investment Bank Research - 28 Aug 2017