The seasonally weak 1H17 is not unexpected given the raining season in Cambodia that slowed down work progress. This is now back in full swing as the dry season has started, coupled with the resumption of Alex Corp?s job after the upgrading contract was signed early of the month. An expected strong 2H17 will bridge up the shortfall, catapulting FY17 earnings to a new high. We maintain our OUTPERFORM rating with price target of RM2.00/SoP share, for its explosive earnings growth story led by the exciting Indochina power infrastructure spending.

1H17 matched expectations. PESTECH reported a better 2Q17 with core profit of RM15.8m, bringing 1H17 core profit to RM22.3m which accounted for 29%/30% of house/street?s FY17 full-year estimates. This is considered as a satisfactory result as traditionally 1H is weak period given that the raining season in Cambodia, which normally affects work progress badly. There was no dividend declared in 2Q17 vs. 3.0 sen paid in 2Q16.

A better sequential quarter. 2Q17 core earnings rose 146% QoQ to RM15.8m from RM6.4m in the preceding quarter with revenue growing 17% to RM119.9m from RM102.8m previously. The improved results were expected albeit the still weak results in 2Q17 given the raining season in Cambodia, which affected work progress. Judging from the amount of minority interest, most of the work claims recognition was still from Diamond Power (DPL) in which PESTECH owns 60% equity stake in the BOT project. For rail electrification project, work progress for Subang Skypark remained slow at 83% awaiting for the stations to be completed. KDVT?s work progress was 9.5% from 5% in 1Q17 while it has completed the rectification works of the damaged OCS at Batu Gajah.

Weaker numbers from last year. 2Q17 core profit fell 36% from RM24.6m with top-line falling 18% from RM146.3m in 2Q16. A stronger 2Q16 was attributable to the full 6M16 earnings contribution from the DPL?s EPC portion being reflected in the quarter. YTD, 1H17 core earnings dropped slight to RM22.3m from RM23.9m for the same period last year, although revenue grew 14% to RM222.8m from RM194.6m in 1H16. The weaker results this year was partly due to higher minority interest as the progress claims for DPL was higher this year compared to the same period last year as the work progress claims for the non-DPL projects were lower this year compared to last year.

Looking to a strong 2H17. 1H17 undoubtedly is a weak period where the Cambodian projects were slowed down due to the raining season there. Work progress is expected to pick up tremendously in the next two quarters as it will back in full swing in the dry season coupled with the Alex Corp?s work already resumed after the upgrading contract was awarded in early February. As of end-December, outstanding order book was RM1.02b from RM1.04b three months ago. With the Alex Corp?s upgrading contract, which is worth c.RM250m, awarded in this month, currently order- book is c.RM1.27b with earnings visibility up to end-2019. Meanwhile, there are still two major tenders, one local rail electrification and one Cambodia transmission line and substation contracts that are pending final outcome in which PESTECH stands a good chance of winning.

Keep OUTPERFORM. We keep our estimates unchanged for now as the expected strong 2H17 will fill up the shortfall in the 1H17. We continue to rate the stock OUTPERFORM for its explosive earnings growth story with unchanged price target of RM2.00/SoP share. Risks to our call include failure to replenish order book and cost over-runs.

Source: Kenanga Research - 27 Feb 2017