PESTECH bagged its biggest contract ever at USD100m from Alex Corp in Cambodia. With payment and credit term likely to be the same as the previous contract with long credit term, receivables are set to rise to another record high which raise concerns. However, default risk is limited as payment is guaranteed by EdC while payment to supplier is matched by EdC’s payment which lessens pressure on PESTECH’s cash- flows. We retain OUTPERFORM at RM2.00/share for its earnings growth story.

Another Alex Corp’s project. Yesterday, PESTECH secured another well anticipated EPC contract for the 220km 230kV double circuit transmission line from Stung Tatay Hydro Power Plant to Phnom Penh and two 230kW lines bays at Stung Tatay HPP Switchyard. The contract was awarded by an existing customer, Alex Corp with contract value of USD100.2m (c.RM440m @ 4.40MYR/USD) for project duration of 36 months which is expected to commence within the next three months. This is the biggest win that it had ever secured in one single contract. To recap, the first Alex Corp’s contract was first secured in March 2014 - the 230kV West Phnom Penh-Sinanoukville transmission line and substation worth USD86.1m. And, later it was awarded an upgrading work that included 500kV double circuit transmission line in Feb 2017 which brought the total contract value to USD143.9m.

Sixth contract for FY17. Although this contract is well expected, it still offers excitement to the company which had so far clinched six contracts worth a total of c.RM910m in FY17, a record sum secured within one financial year. As of Dec 2016, its order book was RM1.02b. Thus, its order book is likely to rise to c.RM1.7b with this contract together with the USD58m upgrading contract in Feb 2017. While this contract is unlikely to have any impact in FY17, we keep our FY18 estimates as it is within our FY18 revenue assumptions. This contract raises FY18 revenue to RM585m, based on billing progress, against our assumption of RM650m. This also means that it needs another RM65m worth of contract to meet our expectation for FY18.

Another long credit term to customer? While there is no disclosure of payment term in the announcement, we suspect the payment arrangement is likely to be the same as the previous arrangement of long credit term to Alex Corp which is over six years period with first payment only starting when the project is completed. And, we understand that it is the same supplier SPECO which also gave PESTECH a long credit term of two years for the first Alex Corp’s project that matched receivable payments from the state-owned utility Electricite du Cambodge (EdC) for Alex Corp’s job. If this is the case, PESTECH’s receivables will eventually rise by another USD100.2m by mid-2020 in MYR term.

OUTPERFORM reiterated. Admittedly, the high receivables look uncomfortable but with the guarantee payment from EdC which matches payment to supplier, this reduces cash-flows concerns at PESTECH’s end. With two major wins in the past two months, PESTECH is still involved in another major bidding which it stands a high success chance and if successful could catapult its earnings to a new high. We continue to rate the stock as OUTPERFORM for its 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 - 07 Apr 2017