PESTECH has won another contract, its third in the past two weeks. This time, it is an Asian Development Bank funded substation and transmission line in Papua New Guinea worth c.RM52m. This is positive as it is a good reference project with secured payment. We believe the contract flow will not stop here as there are three major tenders in the pipeline. We continue to rate the stock OUTPERFORM for its explosive earnings growth story with unchanged price target of RM2.00/SoP share.

Secure RM52m contract in PNG. Last Friday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd had received a Letter of Acceptance from PNG Power Ltd for the Port Moresby Power Grid Development Project in Papua New Guinea (PNG) for the procurement of plant, design, supply, installation, testing and commissioning of KilaKila 66/11kV substation and 66kV double circuit transmission line for a contract value of USD12.7m or c.RM52m. The contract value is divided into two portions; (i) USD7.1m, and (ii) local currency of PGK17.3m or c.USD5.6m. The project is expected to start in Nov for over a period of two years.

Third win in two weeks. This is yet another positive news for PESTECH in the past two weeks after making inroad to a new market in Kyrgyzstan for a small USD8.5m substation upgrading contract and a RM89.5m Sarawak Energy’s substation contract in Bintulu. PNG Power is not a new client to PESTECH as it had executed similar substation project for PNG Power in 2008-2010. On the other hand, this contract win also signifies PESTECH’s technical capability as this project, which is funded by Asian Development Bank (ADB), which has gone through an international competitive bidding process. As this is funded by ADB, it also means that payment is secured.

The best is yet to come. Just merely four months into FY17, PESTECH has already clinched four contracts worth a total of c.RM214m which boost its order book further from RM840m as of end-Jun 2016 with at least two years of firm earnings visibility. This is against our FY17 new job assumption of RM800m. The contract flow will not stop here as among its various tendering, there are at least three major biddings that it stands high chances of securing. These three tenders which could be worth up to RM1.5b in total include one local rail electrification project and two substations and transmission lines projects in Cambodia.

OUTPERFORM maintained. This contract win reiterates that PESTECH is able to compete with international players in this highly regulated industry with high technical requirements. This ADB-funded project is also a good reference project for future tendering. For now, we keep our estimates. We continue to rate the stock OUTPERFORM for its explosive earnings growth story with an unchanged price target of RM2.00/SoP share.

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

Source: Kenanga Research - 10 Oct 2016