Highlights

• Concludes UNIMAP acquisition. Pesona’s acquisition of its 1st tranche (70% stake) in SEP (concessionaire of UNIMAP hostel) was completed in end-Sept. The new 27.65m shares to partially fund the acquisition was issued to the vendors at RM0.70/share on 6 Oct. As for the 2nd tranche (balance 30% stake), this is targeted for completion by March 2018.
• New earnings stream to kick in. With the 1st tranche acquisition completed, Pesona will be able to recognise a new earnings stream from UNIMAP in 4Q17 which we estimate will amount to RM2m. Once Pesona acquires a 100% stake in SEP and assuming a full year impact, we estimate that the UNIMAP concession will contribute RM12m to its earnings. This is rather significant given Pesona’s FY16 earnings of RM20m and our FY17 forecast of RM27.4m. To recap, as concessionaire for the UNIMAP hostel, SEP will receive annually (i) RM28m in fixed payment which is independent of student volume and (ii) RM5m for maintenance of the facility.
• Slow year for job wins. The flow of new job wins to Pesona has been very slow for FY17 with nil secured YTD. Management shared that it lost out on 3 building jobs that it initially targeted for as the margins were too low for comfort. Nonetheless, its orderboook level remains healthy at RM1.7bn, implying 4.5x cover on FY16 construction revenue. It is currently eyeing on a hospital job (RM150m) and a government related facility (RM250m). There could also be job flow potential from its sister-co, Juta Asia (unlisted) via upcoming new property developments.
• Tapping on affordable housing. Pesona is expected to undertake an affordable housing development in Cheras (RM250m) via the PPA1M scheme. Under the scheme, it will receive 10% payment upon SPA signing and 90% upon completion. Judging, from previous PPA1M developments within Klang Valley, the units were mostly fully taken up.

Risks

• Slower than expected new job wins.

Forecasts

• Our FY17 earnings do not reflect any contribution from UNIMAP. However, we are leaving our forecast unchanged given the slow orderbook replenishment YTD.

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

• Our SOP based TP of RM0.76 implies FY18-19 P/E of 13.2x and 11.3x respectively.
• The impending issuance of the remaining 12m shares at RM0.70/share (2nd tranche acquisition of SEP) should set a new minimum benchmark valuation for the stock.

Source: Hong Leong Investment Bank Research - 27 Oct 2017