News

Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd had received the Letter of Award from Dhaya Maju Infrastructure (Asia) Sdn Bhd (DMIA) on 17 Mar 2016 for the electrification and commissioning of the system work for the rehabilitation works of Klang Valley Double Track. The project which is worth RM318m commences today with a duration of 42 months to 30 Sep 2019.

Comments

We are pleased to see that PESTECH has finally secured this highly anticipated rail electrification project. Although this is not its first rail electrification contract as it already clinched the Subang Skypark Rail Electrification more than a year ago, this is still considered a major breakthrough for PESTECH to secure such a big contract in a relatively new business segment.

This will also open door for PESTECH to participate in future KTM’s rehabilitation works and future extension of LRT and MRT projects in the country. Beyond home turf, there are great potentials for such market as well in the ASEAN region and these two rail electrification contracts should serve as strong reference point in their resume.

This project marks its second contract bagged in FY16 totalling YTD orderbook of RM452.4m, on track to meet our full-year assumption of RM700m. This also boosts its current orderbook by one-third from RM934m as of end-Dec 2015. Collection-wise, we have learnt that payment will make directly to PESTECH from the Ministry of Transportation instead of the main contractor DMIA which could reduce collection risk.

Outlook

Overall, earnings are expected to pick up in 2H16 given that Cambodia is now in the dry season; therefore, the Alex Corp and DPL job can now go full-swing while projects for NUR and substations of Mambong and Entinggan, as well as Samajaya are approaching the final stages when higher contract value are recognised.

Forecast

No changes to our FY16-17E numbers.

Rating

Maintain OUTPERFORM

Valuation

Price target maintained at RM7.43/SoP share, which includes: (i) valuing the project and product businesses at 19.1x CY16 PER based on +1.5 SD 3-year mean, and (ii) FCFF valuation for the Cambodia BOT at 7.2% discount rate.

Risks to Our Call

Failure to boost orderbook.

Cost over-runs.

Source: Kenanga Research - 1 Apr 2016