We are positive on PESTECH’s foray into a new market in the Philippines with a small contract win worth RM38m. This should open doors for other contracts there, where 30% of the population are without access to electricity supply. We are looking to see record set of earnings for FY16 results, which is due to be announced next week. Meanwhile, the recent price weakness presents a great opportunity to accumulate this exciting stock with explosive earnings growth story. OUTPERFORM call is retained with price target of RM1.88/SoP share.

First Philippines contract. Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd has received the Notice of Award of Contract from the National Grid Corporation of the Philippines (NGCP) for the upgrading of secondary devices and construction of a separate protection/control building for the unmanned operation of the TIWI Geothermal Power Plant A and C Substations. The contract, which is segregated into two parts in the currency of USD7.0m and PHP111m, is worth a total of c.RM37.8m. The contract duration is 420 days, which will start within the next 40 days.

Small contract but a good start. We are pleased with this piece of news as this contract marks its foray into a new market in the Philippines for the first time although the contract value is relatively small. We see potential there given as 30% or 28m of its population are without access to electricity supply. We understand that the company will focus on small contracts worth USD10m-USD20m each initially to build its base before looking for sizeable contract, which is the same model when it started venturing into Cambodia. Profit margin for this new contract is still within the range of 10%.

Looking to a good ending for FY16. With this new contract, current order book is estimated to be c.RM 1b, which provides at least two firm years of earnings visibility with new job opportunities with tender for RM1.7b worth of job. Meanwhile, PESTECH expects to announce its 4Q16 results in the middle of next week, which we expect to be on track to meet our FY16 estimates of RM54.0m, another record high.

Maintain OUTPERFORM. PESTECH has fallen 11% since Monday as we believe some shareholders may have locked in their profits in view of the recent weak sentiment for small caps. With no negative corporate development and 4Q16 results set to meet our forecast, we believe the recent weakness presents a great opportunity to accumulate this exciting stock with explosive earnings growth story. We maintain our OUTPERFORM call with unchanged price target of RM1.88/SoP share.

Risks to our call include failure to replenish order book and cost overruns.

Source: Kenanga Research - 18 Aug 2016