News  Yesterday, PESTECH announced that its wholly owned subsidiary Pestech Technology Sdn Bhd had on 15 Jan 2015 received a Letter of Acceptance from TNB Repair and Maintenance Sdn Bhd for the supply and provision of Engineering Assistant to install and commission the new governor system upgrading at SJ Penom Pangi, Sabah.

 The project, which is worth RM1.165m, has commenced in Dec 2014 and is expected to be completed within 14 weeks.

Comments  Although the contract sum is relatively small which have no material impact on FY15 earnings, it does help to build up a good reference for future project tendering. In fact, this is PESTECH’s first project for this type of job, which is usually handled by foreign firms as there is no such expertise locally.

 For this project, PESTECH will work together with its system partner, METSO Automation by utilising the latter’s state-of-the-art Distributed Control System (DCS), known as METSO DNA. Upon project completion, this project would be yet another milestone for PESTECH in localising know-how in the field of DCS for power plant automation.

 By implementing this project, it will address obsolescence issue of the existing system whilst improving operational controllability, flexibility and efficiency of the power plant. As such, this project could be a good reference in tendering for similar jobs in TENAGA’s (OP; TP: RM14.65) power plants in Peninsular Malaysia. In addition, we understand that this project fetches 15% net margin, which is relatively good compared to PESTECH’s average net margin of 9%-11%.

Outlook  Earnings for the remaining 9-month period of FY15 are expected to be stronger than the first 9 months given that billings for both Alex Corp and Sakura projects are expected to contribute more than their initial stage. Note that FY15 has an 18-month period due to a change in its financial-year-end to June from Dec.

 In addition, the current order book of c.RM550m should provide close to two years of firm earnings visibility. Besides, PESTECH should have a fair chance of securing some projects from its current tender book of c.RM1.3b.

Forecast  No changes to our FY15-FY16 estimates.

Rating Maintain OUTPERFORM

Valuation  Share price has fallen 13% since Nov 2014 in tandem with the overall volatile market. This presents a great buying opportunity into this high-growth company as its valuation looks fairly compelling at CY15 10x PER for a stock with 3.5-year earning CAGR of 62%.

 We keep our price target of RM4.36/share unchanged, based on CY15 PER of 13x.

Risks to Our Call Failure to replenish orderbook.

 Cost over-runs.

Source: Kenanga