Pintaras Jaya recorded core net profit of RM9.6m in 1QFY20, 21x higher compared to 1QFY19. However, on a sequential basis, core net profit dropped by 66% qoq. This was mainly due to a lower operating profit margin for its piling and manufacturing segments, and higher effective tax rate. While we expect its manufacturing profit margin to remain pressured, we believe the piling profit margin is sustainable in view of higher piling revenue. The effective tax rate is expected to normalize in the subsequent quarters. Overall, we maintain our BUY call with a slightly lower TP of RM4.04.

Higher Core Net Profit

Net profit jumped by 99% yoy to RM5.6m in 1QFY20. This is on the back of higher revenue (+135% yoy), mainly from the higher contribution from its Singapore operation. Excluding one-off items, core net profit increased by 21- fold to RM9.6m. We deem this to be within our expectation as we believe its piling earnings will pick up in subsequent quarters.

Current Order Book Exceeds RM400m

On a sequential basis, core net profit dropped 66% qoq mainly due to lower operating margins from the piling (-2.9ppts) and manufacturing (-5.1ppts) segments, and a higher effective tax rate of 44% (vs. 7% in 4Q18). We believe the effective tax rate will normalize in the subsequent quarters as we assume a 20% rate in FY20E. Pintaras’ current order book of around RM400m is expected to support its earnings in FY20. Separately, we gather that Pintaras is buying more piling rigs for its operation in Singapore to support the strong piling demand in the country. Year-to-date, the group has spent close to SGD10m for capex. Coupled with its high tender book of RM4bn, we expect the group to secure more contracts in FY20.

Maintain BUY

We tweak down our FY20-22E earnings by 1% to account for lower manufacturing margin assumptions. We maintain our BUY call on Pintaras with a lower TP of RM4.04 (from RM4.07) based on a target FY20E PER of 12x. Its FY20E PER of 10x and net yield of 6% remain attractive. Its balance sheet position remains strong with net cash of RM65m or RM0.39/share.

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 - 25 Nov 2019