Slow Recovery Ahead

Pintaras Jaya’s prospects to grow its order book remain challenging. The government’s cut in infrastructure spending and the property market slowdown have led to weak demand for piling services. The expansion in piling capacity by local players and the entry of Chinese piling companies have intensified competition in the sector. Nonetheless, Pintaras is in a relatively strong position to weather the downturn due to its strong balance sheet and no expansion in capacity over the past 3 years. We maintain our HOLD call with a reduced RM2.46 TP, based on a lower FY19E PER of 13x.

Order Replenishment Improved

Pintaras secured RM150m of new contracts in FY18, higher than the RM20- 30m in new contract wins in FY17. The largest contract secured in FY18 was the one for RM68.5m to provide piling and substructure works for the Riveria Sentral office and serviced apartments. Its order book was RM100m as at 30 June 2018, which is about 0.9x our FY18E revenue. We assume Pintaras will secure new contracts worth RM150m in FY18, RM200m in FY19 and RM250m in FY20E in our earnings forecasts.

Challenging Prospects for New Contracts

Its tender book has declined to RM0.7bn from RM1.1bn a few months ago. This is after losing a few tenders for new projects. There were fewer new contract tenders after the 14th General Election as several large-scale infrastructure projects were cancelled or suspended, eg, East Coast Rail Link, KL-Singapore High Speed Rail and MRT Line 3.

Exploring Opportunities in Singapore

Pintaras is exploring prospects to lease some of its 30 bore piling machines in Singapore as its capacity utilisation has dropped to below 50%. The margins are low for leasing contracts in Singapore but this is mainly to cover the depreciation cost. It is also exploring the potential acquisition of a piling company to penetrate the Singapore market.

Maintain HOLD

Pintaras is in a relatively better position to weather any construction sector slowdown due to its high net cash of RM157m or RM0.94/share as at 30 June 2018 37% of its current market capitalisation. We find the net yield of 7.8% attractive, and maintain our HOLD rating.

Better Long-term Prospects

Long-term prospects for Pintaras should improve under the new government’s policy to exclude foreign contractors from tenders for publicsector projects if there is local expertise. Chinese piling companies bidded aggressively for the MRT Line 2 and LRT Line 3 contracts, which previously posed stiff competition to local companies such as Pintaras. Although the pie could be smaller due to the government’s plan to reduce the cost of infrastructure and building projects, we believe that efficient piling companies like Pintaras will remain competitive with a level playing field. There will also be opportunities for Pintaras to bid for the Malaysian government’s affordable housing projects, which are expected to be awarded on an open tender basis in the future. Most of these projects had been awarded on a negotiated basis in the past to politically-linked companies.

Potential Expansion Abroad

There are opportunities to expand its business via acquisitions given the depressed valuations of piling companies in the current challenging market environment. Pintaras is setting its sights on potential acquisitions in Singapore to expand its business abroad. The demand for piling services is likely to be sustained by the Singapore government’s plan to continue building HDB flats to meet the rising demand for affordable housing.

Reduce 12-month TP to RM2.46

We reduce our TP for Pintaras to RM2.46 from RM2.85, using a lower FY19E target PER of 13x (22% below 6-year historical mean PER of 16.6x) instead of 15x previously, to reflect the earnings forecast risks. Still, we believe that Pintaras’ strong balance sheet and high dividend yield mitigates the investment risk given the current cyclical sector downturn. Pintaras’ current CY19E PER of 11.4x is also below the peer average of 13.4x while its current dividend yield is the highest among peers. The current price/book of 1.3x is close to its 6-year mean level of 1.2x.

Source: Affin Hwang Research - 7 Aug 2018