PESTECH has finally received the highly anticipated upgrading project for Alex Corp., which involves the first 500kV transmission line in Cambodia for an additional contract value of USD58m. As the payments to supplier and from vendor remain the same upon the project?s completion, i.e., end-2019, this lessens pressure on PESTECH?s cash-flow and it is also guaranteed by EdC. We believe the best is yet to come for PESTECH as it still has two major tenders, which stand high chance of success. This should escalate PESTECH to a new high, should it succeed in the tenders. OUTPERFORM maintained at RM2.00/SoP share.

Secured USD58m upgrading contract. On Wednesday, PESTECH finally secured the well anticipated upgrading contract from Alex Corp. for the design, engineering, manufacturing, installing, testing and commissioning of the 230kV West Phnom Penh-Sihanoukville transmission line and substation, which was initially awarded in March 2014. This new upgrading works raised the total contract value for the project to USD143.9m from USD86.1m previously. The works for this upgraded project include the transmission line of: (i) 230kV double circuit transmission line from Stung Hav Substation to Chamkar Loung, and (ii) 500kV double circuit transmission line from Chamkar Loung to Bek Chan. Completion of the upgraded project is expected by November 2019.

First contract in 2017. Although this contract is well expected, the news is highly positive as it is the first contract secured in four months. With this additional USD58m upgrading contract, PESTECH has clinched a total of five contracts in FY17 with total contract value worth more than double of RM469m from RM214m previously. As of Sep 2016, its order book was RM1.04b. Thus, its order book is likely to rise to c.RM1.30b with this contract. Nonetheless, this upgrading contract does not change our earnings estimates as it is within our FY17-FY18 revenue assumptions. This contract raises revenues for FY17/FY18 to RM589m/RM438m, based on its project?s duration, against our assumptions of RM580m/RM620m. This also means that our FY17 estimate is achievable while it needs another RM211m worth of contract to meet our expectation for FY18.

Receivables expected to rise further? In the previous arrangement of long credit term to Alex Corp., which was over six-year period with first payment only starting when the project is completed by this year end. As a result, the latest 1Q17 results reported RM240m receivables for amount due from contract customers as of Sep 2016. On the other hand, the supplier SPECO also gave PESTECH a long credit term of two years with first payment starting in early 2018 that matches receivable payment from the state-owned utility Electricite du Cambodge (EdC) for this Alex Corp.?s job. With this new upgraded contract, we understand that payment terms for both to Alex Corp. and from SPECO are amended accordingly to this new contract, i.e., both first payments are now delayed to end -2019 when the project is completed. As such, receivables at PESTECH?s end will eventually be equivalent to USD143.9m by end-2019.

The best is yet to come, OUTPERFORM maintained. Although the credit term is long, raising concerns over the issue of high receivables, it is guaranteed by EdC and is matched with payment to supplier, reducing cash-flow problem at PESTECH?s end. With this contract in hand, PESTECH is still involved in two major biddings that it stands high chances of securing, which could bring its earnings to a new high if it succeeds in the tenders. 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 Feb 2017