PESTECH posted another impressive result that was largely helped by financial income from DLP for the construction period. Having said that, future earnings remains upbeat as the recurring DLP concession income starting 3Q18 should provide a comfortable income stream beside the EPC contract flow. We keep our OUTPERFORM call with an unchanged target price of RM2.00/SoP share, for its earnings growth story led by the exciting Indochina power infrastructure spending.

FY17 beat expectations. PESTECH reported 4Q17 results, which came above expectation with core profit of RM42.4m, bringing FY17 core earnings to RM83.0m which beat our forecast by 15%. The positive set of results was largely due to the higher-than-expected financial income from Diamond Power (DPL) amounting to RM21.5m in 4Q17. There was no dividend declared during the financial year. However, we expect the dividend to be announced at a later date similar to FY16 when PESTECH declared its final NDPS much later after the 4Q16 results release. We still expect it to announce 2.9 sen for FY17.

4Q17 helped by financial income. 4Q17 core profit surged 143% QoQ to RM42.4m from RM17.4m in 3Q17 despite revenue declining 33%, this was largely due to the abovementioned financial income for DPL during the construction period. Post construction period by this year-end, operating income will be roughly RM300m over the next 25 years. On the other hand, 4Q17 revenue fell unexpectedly by 33% as the raining season came earlier than expected in Cambodia. Nonetheless, the DPL is still on track for completion this year-end.

Another record year. On a YoY comparison, 4Q17 earnings soared 86% although revenue contracted 40% from 4Q16 for the same reasons mentioned above. YTD, FY17 core profit grew 6% to RM83.0m from RM78.1m in FY16 with revenue flattish at RM508.7m. In fact, both 4Q16 and 4Q17 results were largely driven by DPL as the company recognised higher financial incomes before the financial year closing.

The start of recurring income in FY18. Although FY16 and FY17 results were boosted by DPL’s financial incomes, we would still expect this in 1H18 before the concession starts this year-end to be reflected from 3Q18 onwards. This will mark its recurring income-stream over the next 25 years. Meanwhile, its current order-book which stands at c.RM1.5b will keep PESTECH busy up to end-2019. In all, we keep our FY18-FY19 estimates unchanged for now.

Maintain OUTPERFORM. PESTECH has been posting earnings growth year after year since listing in 2012, and we believe with its order-book in hand coupled with the expected recurring income from the BOT of DPL, forward earnings look resilient. We continue to rate the stock OUTPERFORM with price target of RM2.00/SoP share for its earnings growth story. Risks to our call include failure to replenish order book and cost over-runs.

Source: Kenanga Research - 25 Aug 2017