Pesona’s 1HFY18 earnings of RM6.5m (-46% YoY) were below both our and consensus estimates. YTD core PATAMI decreased due to due to slower construction progress, higher construction cost and depreciation charges as well as additional finance cost arising from acquisition of Phase 1 of SEP. Pesona managed to secure RM596m worth of new jobs YTD (FY17: nil). This brings its orderbook to RM1.9bn, translating into 3.7x cover ratio on FY17 construction revenue. Cut FY18-20 earnings by 10-14% after taking into account higher finance costs and depreciation charges. Maintain HOLD rating with higher SOP-driven TP of RM0.30 (from RM0.28) following earnings cut and roll forward of valuation horizon from FY18 to mid-FY19.

Below expectations. Pesona reported 2QFY18 results with revenue of RM143.4m (- 16% QoQ, -21% YoY) and core earnings of RM3.6m (+21% QoQ, -41% YoY). This brings 1HFY18 core earnings to RM6.5m, decreasing by 46% YoY. The core earnings accounted for 40% of our full year forecast (consensus: 35%), below both our and consensus estimates. This is mainly due to higher than expected finance cost and depreciation charges arising from acquisition of Phase 1 of SEP.

YoY. Core PATAMI decreased by 41% mainly due to slower construction progress, higher depreciation charges and higher finance cost arising from SEP acquisition, partially offset by recovering gross profit margin.

QoQ. Core PATAMI increased by 21% mainly due to the cost saving from the completed projects which was recognized during the quarter, partially offset by lower revenue.

YTD. Core PATAMI decreased by 46% due to slower construction progress, higher construction cost and depreciation charges as well as additional finance cost arising from acquisition of Phase 1 of SEP.

Healthy orderbook level. Pesona managed to secure RM596m worth of new jobs YTD (FY17: nil). This brings its order book to RM1.9bn, translating into healthy 3.7x cover ratio on FY17 construction revenue.

Cautious on job flow outlook. Following the change in government post GE14, we have turned cautious on the overall macro job flow outlook for the construction sector. The new administration has stated that it will put all mega projects under review to ensure that the terms are fair to the government and country. We feel that this will result to project award delays (as they are reviewed) or in the worst case, an outright cancellation.

Higher competition for private sector jobs. Pesona has traditionally relied more on private sector developers for jobs as opposed to the public sector. Nonetheless, with the potential scaling back of government spending, we feel that competition for private sector jobs could intensify as other contractors start bidding within this space.

Forecast. Cut FY18-20 earnings by 13.5%, 10.1% and 8.0% respectively after taking into account higher finance costs and depreciation charges as mentioned above.

Maintain HOLD, TP: RM0.30. Maintain HOLD rating with slightly higher SOP-driven TP of RM0.30 (from RM0.28) following earnings cut but offset by the roll forward of valuation horizon from FY18 to mid-FY19.

Source: Hong Leong Investment Bank Research - 24 Aug 2018