News

Yesterday, PESTECH announced that its subsidiaries Pestech (Cambodia) Ltd and Enersol Co. Ltd., had on 19 May 2015 entered into contract agreement with Diamond Power Ltd (DPL) to undertake the design, build, testing and commissioning of the 230kV Kampong Cham-Kratie Transmission System Project for a total contract value of USD60.6m (c.RM212m).

DPL, in which PESTECH owns a 60% stake, is the concession owner of the said transmission line on a BOT basis, which was awarded early last month. This EPC work is expected to start in Jun 2015 and completed by Nov 2017.

Comments

This contract award is not unexpected given that PESTECH is the largest shareholder of the concession asset with 60% equity stake and its EPC track record leverage. As such, PESTECH is getting two earnings streams from this BOT project: (i) the one-off EPC portion, and (ii) a 25-year recurring income from managing the asset.

Although the actual contract value of USD60.6m is lower than our earlier expectation of USD70m, we remain positive as it is finally in the bag. This should bring the group’s total order book to c.RM767m which will keep them busy till end-2017.

With this, it has secured four projects in 2015 (totalling RM290m) and its ninth project for FY15 so far (18- month period - Jan 2014 to Jun 2015) with total project value of RM657m, which is c.20% higher than our FY15 assumption of RM550m new order book.

Outlook

Earnings for the remaining 6-month period of FY15 is expected to remain strong given that billings for both Alex Corp and Sakura projects are expected to contribute more from the initial stages. The net profit for the upcoming 5Q15 results, which is set to be released by the end of the month, is expected at c.RM 8m, which is on track to achieve our 18-month FY15 projection of RM40.2m.

On the other hand, the newly awarded Cambodia concession business offers a guaranteed recurring income over 25 years in contrast to its existing business where contracts only last for 2-3 years. This could easily contribute RM16m-RM20m/year to PESTECH's bottom-line from 2020 onwards. This is a substantial impact to PESTECH judging from its net profit of RM24.3m in Jan-Dec 2014.

Forecast

No changes to our FY15-FY17 estimates.

Rating

Maintain OUTPERFORM

Valuation

Price target of RM6.11/SoP maintained. This is based on: (i) CY16 16.6x PER (+1.5 SD 3-year mean) on existing business, and (ii) FCFF @ 7.2% discount rate on the Cambodia BOT.

Risks to Our Call

Failure to boost orderbook.

Cost over-runs.

Source: Kenanga Research - 20 May 2015