Recommending TRADING BUY on PTARAS with a FV of RM4.20 (total return of 22%) based on Sum-of-Parts, implying FY17E PER of 12.5x. PTARAS is expected to see strong earnings recovery with projected growth of 77%-8%, underpinned by orderbook replenishment assumption of RM250.0m-RM350.0m, for FY17EFY18E due to better industry outlook. That said, PTARAS is expected to payout at least FY16-17E DPS of 10.8-19.0 sen (3.0%-5.3% yield).

Moving on.We met up with Pintaras Jaya Bhd (PTARAS)’s management recently who acknowledged that 2015 had been a very slow year. However, management are expecting FY17-18E earnings to stage a strong recovery (refer overleaf).

Planning ahead. Since last December, PTARAS is back in the limelight bagging four jobs amounting to RM189.4m in less than two months, bringing its outstanding orderbook to a healthy RM250.0m providing one year of earnings visibility. That said, management remains hungry for more jobs and they planned to incur RM30.0m (historically, RM15.0m-RM20.0m) for CAPEX in FY17 in order to cater for the influx of infrastructure jobs that are to be dished out from 2H16 onwards.

RM250.0m-RM350.0m replenishments target highly achievable. Currently, PTARAS’s capacity is limited to an orderbook size of c.RM250.0m. With their newly added capacity in FY17, we reckon they would be able to churn up to RM350.0m worth of jobs in FY18. Hence, we are assuming an orderbook replenishment of RM250.0-350.0m for FY17-18E and we believe our target is highly achievable given that their competitors are able to secure up to c.RM420.0m worth of jobs per annum, given the massive amount of infrastructure and building jobs are in the pipeline. We expect a shortage of pilling contractors to cater for the surge in demand, which will further benefit PTARAS. To recap, PTARAS was once appointed a rescue-piling contractor for KVMRT1 previously as certain contractors failed to deliver their work package on time.

Strong earnings growth of 77%-8% in FY17-18E. In the past, PTARAS has maintained a decent net margin of >20%, which is far superior, compared to its listed peers (IKHMAS, ECONBHD) average net margins of 10%. This is largely due to management’s conservative approach in tendering for jobs. While this might cause PTARAS to lose out to its competitors, they are able to generate better returns. While we are expecting FY16E earnings to come down by 40%, we are expecting a strong growth recovery of 77%-8% for FY17-18E. Comparatively,its FY17E earnings growth of 77% is still fairly decent vis-à-vis its peers’ growth of only 6%.(Refer overleaf for details).

Cash rich and decent dividend yield.As of 2Q16, PTARAS have a net cash position of RM184.2m with a net cash to total asset ratio of 46% vis-à-vis ECONBHD’s 3%. That said, PTARAS’ management indicated that they will strive to maintain their existing dividend pay-out ratio at 56%or higher, which is still fairly decent as compared to ECONBHD’s pay-out ratio of c.30%, albeit not having a formal dividend policy. Furthermore, at current levels its FY17-18E dividend yields are much more compelling at 3.0%-5.3% vs. its peer’s average of 2.0%-2.1%.

Trading Buy. We like PTARAS for several reasons; (i) prudent management, (ii) strong recovery in earnings from FY17 onwards underpinned by its decent outstanding orderbook of c.RM250.0m, (iii) strong infrastructure job flows ahead and decent growth. Hence, we are calling a Trading Buywith a Target Price of RM4.20 based on SoP, which implies a higher PER of 12.5x as compared to its peers’ average of 9.3x. Furthermore, even at our Fair Value of RM4.20, it still implies a fairly decent dividend yield of 2.6%-4.5% compared to its peers’ average of only 2.0%-2.1%, which further justified PTARAS’s premium valuation over its peers.

Moving on. We met up with Pintaras Jaya Bhd’s (PTARAS) management recently, and management has admitted that 2015 had been a very slow year for them due to diminishing orderbook, which subsequently led to poor earnings performances in 1H16. To recap, its revenue and net profit for 1H16 plunged by 52% and 65% respectively as it’s outstanding orderbook had once hit a low of RM70.0m in the past 6-months. While managements are expecting a weaker performance for FY16 due to the timing of its orderbook replenishments, they remained hopeful with the prospect that lies ahead for FY17-18, underpinned by strong infrastructure job flows from KVMRT2, LRT3, SUKE, EKVE, DUKE, and BBCC.

Strong earnings growth of 77%-8% in FY17-18E. In the past, PTARAS has maintained a decent net margin of >20%, which is far superior, compared to its listed peers (i.e. IKHMAS & ECONBHD who have average net margins of c.10%-11% in past years). This is largely due to managements’ conservative approach in tendering for jobs, while this might cause PTARAS to lose out to its competitors on job flows, they are able to generate better returns as they only need to approximately half of its competitors' orderbook size to generate the same amount of return, which makes them more flexible in choosing for their preferred jobs. While we are expecting FY16E earnings to come down by 40%, we are expecting a strong growth recovery of 77%-8% for FY17-18E, underpinned by our orderbook replenishments of RM250.0m- RM350.0m.

Source: Kenanga Research - 9 May 2016