Pintaras Jaya reported 9MFY19 result that was below expectations. Net profit fell 18% yoy to RM10m in 9MFY19. We were surprised by the amortisation of intangibles, impairment of investments and receivables. Excluding these one-off items, core net profit increased 238% yoy to RM35m in 9MFY19, exceeding our expectations. We raise our core EPS forecasts by 5-63% in FY19-21E and lift our target price (TP) to RM3.16, based on FY20E core PER of 12x. We upgrade our call to BUY from Hold.

Strong Core Earnings Growth

Net profit of RM9.9m in 9MFY19 comprised only 39% of full-year consensus and our previous full-year forecasts of RM25.4-25.8m. We were surprised by the net exceptional loss of RM39.2m in 9MFY19, contributed by an RM11m amortisation of intangibles (construction order backlog of Pintary International), RM13.4m provision for impairment of receivables, RM4.8m fair value loss on financial assets. Revenue tripled to RM225m while core net profit jumped 238% yoy to RM34.8m in 9MFY19, boosted by earnings contribution from Pintary, which was acquired on 14 September 2018. Its Singapore operation contributed 70% of group revenue in 9MFY19.

Profit Margin Expansion

Revenue increased 11% qoq to RM98m, while core net profit jumped 162% qoq to RM24.4m in 3QFY19. The improved operational performance was driven by higher progress billings and EBIT margin expansion to 24.9% in 3QFY19 from 12.1% in 2QFY19. We gather that EBIT margin on its remaining order book of RM230m is expected to be remain stable and even improve.

Upgrade to BUY

We upgrade our call on Pintaras to BUY from Hold, given the attractive FY20E PER of 9x and net yield of 8%. Pintaras declared an interim DPS of 8 sen, on track to achieve our FY19E DPS of 20 sen. We lift our TP to RM3.16 from RM2.41 after rolling forward our valuation to 2020E and reducing target PER to 12x from 13x, reflecting weaker market sentiment.

Earnings Upgrade

The acquisition of Pintary has improved earnings visibility for the group as the prospects of the Singapore market for piling services remain good. However, the domestic market remains challenging due to the weak property market, while the implementation of infrastructure projects have been delayed. We upgrade our core EPS forecast by 5-63% in FY19-21E to reflect higher new contract assumptions of RM450m (boosted by Pintary acquisition), RM250m p.a. in FY20-21E from RM200-250 p.a. previously.

Key Risks

Key downside risks are: (1) inability to secure piling jobs will pose earnings risk; (2) earnings lag due to timing of contract wins; (3) thinner margins due to a competitive environment; (4) defect liabilities and execution risks; (5) slowdown in construction contract awards.

Source: Affin Hwang Research - 27 May 2019