Following our Trading Buy call on PESONA last week (3/11/2016), its share price rallied and exceeded our Target price of RM0.485. With no new catalyst in place with an unchanged earnings estimates, we make no changes to our TP and advocate investors to Take Profit (from Trading Buy) and accumulate PESONA again should opportunity arises. Our TP of 0.485 is based on 9.0x FY17E PER.

Share price exceeded our target. Since our "Trading Buy" call with a TP of RM0.485 on the 3rd November 2016, PESONA has surged 12% to RM0.49, showcasing YTD gains of 22.5% above KLCON’s average of 5.6%. We believe PESONA started gaining traction ever since their latest two contract wins on the 21st October (Eaton Residence) and 2nd November (I-City Mall) with a cumulative value of RM890m, which boosted their outstanding order book by 63% within that two weeks span. Aside from that, PESONA’s 1H16 PAT also displayed YoY improvement of 75% boosted by higher revenue of 26% coupled with higher-margin jobs.

Story intact with no fresh catalysts. To recap, PESONA is 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% is only expected to be completed by FY17 should they are able to get approval for the waiver on the Bumiputra ownership requirements. The concession is expected to generate average yearly PAT of c.RM10.0m for the next 20 years (FY17 onwards). On the construction front, PESONA currently has an outstanding order book of RM2.3b, which comfortably provides strong earnings visibility to the group for the next 3-3.5 years.

Earnings projections maintained. With c.RM1.0b tender book in hand, we continue to maintain our target order book replenishment of RM1.9b for FY16 (RM0.1b left to be achieved) and RM400m for FY17 as we expect PESONA to focus on projects execution moving forward. As such, there are no changes to our FY16-17E earnings of RM23.9-39.3m. To recap, we have factored in only 70% of UNIMAP earnings contribution in our FY17E earnings previously.

Take Profit. Following the share price rally, PESONA is currently trading at FY17E PER of 9.1x which we consider fair against our small-mid-cap peers’ applied range of 9.0x-13.0x due to PESONA’s weaker construction margins. We note that should PESONA successfully secure the remaining 30% equity in SEP, its TP would warrant further upside to RM0.52. However, for now, we advocate investors to lock in profits and re-accumulate on weakness should the opportunity arises as the acquisition on the remaining 30% equity stake in SEP might not materialise in the near-term.

Source: Kenanga Research - 11 Nov 2016