INVESTMENT MERIT

PESONA, a small cap contractor, will be venturing into their first concession, which entails maintenance of student hostels at UNIMAP; with further potential of securing another two concessions. YTD, PESONA has bagged record high wins of RM1.8b. We are projecting FY16-17E earnings of RM23.9m-RM39.3m on the back of RM1.9b-0.4b replenishment in FY16-17E. Trading Buy with TP of RM0.485 based on 9.0x FY17 PER.

Hot on replenishments. PESONA is a small cap contractor that has little market attention until recently as they had been on a winning streak, securing RM1.8b worth of construction jobs YTD.

Just yesterday, PESONA had secured their single largest contract win worth RM488m for the construction of Central Plaza I-City Mall in Shah Alam. Consequently, this has beefed up their outstanding order book to a record high of RM2.3b, which comfortably provides strong earnings visibility to the group for the next 3-3.5 years.

Building up its first recurring income stream and more to come… Apart from its construction business, PESONA is striving to build up a recurring income stream that would help mitigate the cyclical risks in the construction sector. Hence, they are currently venturing into their first concession business, which entails the development and maintenance of student hostels in Universiti Malaysia Perlis (UNIMAP) through the acquisition of SEP Resources S/B for RM29.2m. The acquisition of SEP would take place in two tranches by acquiring 70% of SEP in the first tranche by FY16 while the remaining 30% would be completed by FY17 should they be able to get approval for the waiver on the Bumiputera ownership requirements. The concession is expected to generate average yearly PAT of c.RM10.0m for the next 20 years (FY17 onwards). SEP aside, PESONA is still eyeing for two other potential concessions (refer overleaf for more details).

Earnings estimates. With c.RM1.0b tender book in hand, we target a replenishment of RM1.9b for FY16 (RM0.1b left to be achieved) and a lower replenishment of RM400m for FY17 as we expect PESONA to focus on projects execution moving forward. By only factoring 70% of UNIMAP earnings from FY17 onwards, we expect PESONA to generate FY16-17 earnings of RM23.9m-RM39.3m. Note that: (i) we have chosen to omit the remainder 30% earnings contribution from SEP should PESONA fail to acquire due to Bumiputera ownership requirements, and (ii) yesterday’s contract win of RM488m is factored into our estimates.

Peers comparison (MITRA, KIMLUN, HSL). PESONA’s FY17 construction PBT margins of 7% remain weak against peers’ range of 7-14%; coupled with its FY17 net gearing of c.0.3x being higher than peers (net cash-0.2x). However, we note that its FY17E dividend yield of 4.6% (37% DPR) outshines peers’ yield of 1.5- 3.0%. Its FY17 earnings also chart strong growth of 65%; higher than peers’ growth of 8-26%. Meanwhile, its RM2.3b outstanding order book is on the higher end against peers’ range of RM1.5bRM2.3b.

Trading Buy with TP of RM0.485. We value PESONA at RM0.485 base on 9.0x FY17E PER with a Trading Buy call. We feel our valuation is justifiable as it is at the lower end of the applied valuation range for small mid cap peers in our universe of 9.0-13.0x due to their weaker construction margins. We have accounted for the dilution for their remaining 150m warrants (expiry in 2020) into three equal proportionate tranches from FY17-FY19. Note that should PESONA successfully secure the remaining 30% equity in SEP, its TP would warrant further upside to RM0.52.

Source: Kenanga Research - 3 Nov 2016