News  Yesterday, Pestech International (PESTECH) announced that its wholly-owned unit PESTECH (Cambodia) Ltd had executed an agreement with Alex Corporation Co. Ltd. for the design, engineering, manufacturing, installation, testing and commissioning of the 230KV West Phnom Penh – Sihanoukville 198km Transmission Line and 230/115/22KV Substation Extension Project.

 The project valued at USD86.065m (c.RM280m), is expected to start within three months with a construction period of 32 months.

Comments  We are very positive on its ability to secure more contracts. This is the second contract win this year after the RM85.0m Mambong and Entinggan 275KV substation extension project in mid-Jan.

 This brings YTD total value wins to RM365m, which is higher than our FY14 new order assumption of RM350m, which is impressive given that we are only three months into FY14.

 Its current orderbook is currently slightly more than RM700m from RM424m in Jan-14.

 Profit margin for this project is expected at c.20% at operating level, which is the norm for such projects.

Outlook  The RM700m orderbook should provide at least two years of firm earnings visibility. With its current tenderbook of RM1.33b, we believe our new order assumption of RM350m-RM400m in FY14-FY15 is not overly optimistic.

Forecast  Although its YTD contract win of RM365m is higher than our FY14 new order assumption, we are keeping our estimates for now as the impact in FY14 would likely be insignificant given that the earnings recognition during the early part of the project period is likely to be low.

Rating Maintain OUTPERFORM

Valuation  Given its earnings visibility and contract flow momentum coupled with relatively low share liquidity, investors may be willing to pay for a higher valuation for PESTECH. Thus, we are upgrading our target CY15 PER to 12x from 10x previously. As such, our new price target is now raised to RM4.93/share from RM4.10/share.  

Risks to Our Call  Failure to replenish orderbook.

 Cost over-runs.

Source: Kenanga