News  Yesterday, Pestech International (PESTECH) announced that it is proposing a 2-for-3 bonus issue to increase its issued shares by 65.6m shares to 164.1m shares.

 The proposed bonus issue will be capitalised from share premium, leaving retained earnings unchanged.

 While the entitlement date is to be determined later, the proposed bonus issue is conditional upon approvals by the authorities and shareholders of PESTECH and is targeted to be completed by 3Q14.

Comments  We are positive with this exercise, although, in theory, the value of the company shall remain the same.

 However, the bonus issue will definitely enhance the trading liquidity, with a larger share base, which is one of the key issues being faced by PESTECH.

 By capitalising the share premium, its retained earnings can be quite handy for future usage. The current retained earnings translate into a 36.3 sen/share based on the enlarged share base.

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  No changes to our FY14-FY15 estimates.

Rating Maintain OUTPERFORM

Valuation  Reiterate price target of RM4.93/share, based on 12x CY15 PER.

 The 12x targeted PER is not excessive given its explosive annual earnings growth of 40% for the next two years.

 Even then, the 40% earnings growth forecast is still not overly optimistic, as the assumptions of two-year combined revenue of RM580m and new order of RM750m are fairly conservative given its current orderbook of RM700m and tenderbook of RM1.33b.

 Ex-bonus issue, target price will be adjusted to RM2.96/share while share price to 2.78/share.

Risks to Our Call Failure to replenish orderbook.

 Cost over-runs.

Source: Kenanga