While 9M16 results were weaker than expected, the just proposed share split and bonus issue could be immediate price catalysts to entice buying interest. We are not overly concerned over the 9M16 results which were mainly reflective of non-operational issue on the recognition of MI for its BOT project. We keep our OUTPERFORM rating with new price target of RM7.52/SoP share.

3Q16 below. At 68%/69% of house/street’s FY16 estimates, the 9M16 core profit of RM40.4m came below expectations owing to the reported MI of RM14.6m. We had previously assumed that the EPC portion of Diamond Power (DPL) will be recognised by Pestech Cambodia, which is a 100% subsidiary of PESTECH. However, it was recognised under DPL, which is the concession owner which PESTECH has 60% ownership. MI aside, PESTECH operating numbers were well on target. No dividend declared in 3Q16 as expected.

Earnings normalised. Sequentially, 3Q16 core net profit fell 53% to RM11.6m from RM24.6m in the preceding quarter while revenue declined 16% to RM123.4m from RM146.3m previously. This was mainly due to the normalisation of DPL earnings as the 2Q16 numbers were the maiden revenue recognitions of RM88.4m for the period of 1H16. On the other hand, the reported headline net profit fell at a smaller quantum of 28% in 3Q16 given the gain of RM938k unrealised forex gain as MYR weakened as opposed to a loss of RM7.3m in 2Q16 when the MYR recovered against the greenback.

… led by DPL. The 3Q16 core earnings soared 52% YoY from RM7.6m while revenue jumped 68% to RM123.4m from RM73.3m in the corresponding quarter last year. The key driver was mainly due to the abovementioned DPL which has begun earnings recognitions in 2Q16. Likewise, 9M16 core net income jumped 80% to RM40.4m from RM22.5m in the corresponding period last year while topline leapt 52% to RM318.0m from RM208.6m previously on the DPL factor.

Share split and bonus issue to cheer. Yesterday, PESTECH also announced that it has proposed a 1-into-2 share split, of which the new split share is entitled for another 1-for-1 bonus issue. This exercise is targeted for completion by 3Q16. Although theoretically there is no change in stock valuations, this news could entice buying interest, which is positive to its share prices.

Outlook remains upbeat. Despite a weaker set of earnings in 9M16, we remain optimistic on PESTECH’s prospect given its sizeable orderbook of RM1.11b as of end-Mar, which provides at least two firm years of earnings visibility, as well as new job opportunities in which it has tendered for RM1.7b worth of jobs. However, we trim FY16-17E earnings by 9-13%, solely to account for the MI recognition. The MI is expected to go away in FY18 as the EPC job of DPL is scheduled to complete by Nov 2017, which is 1Q18. We introduce FY18 estimates where earnings are set to grow 32% on the back of assumptions of RM1.0b new job orders and RM650m revenue.

Maintain OUTPERFORM. We have a new price target of RM7.52/SoP share, from RM7.43/SoP share previously, or ex-share split and bonus issue price target of RM1.88/SoP share after a roll-over of valuation baseyear to CY17. Despite a weaker set of 9M16 results, the proposed share split and bonus issue could act as price catalysts for the near term. Thus, we retain our OUTPERFORM rating on the stock. Risks to our call include failure to replenish orderbook and cost over-runs.

Source: Kenanga Research - 27 May 2016