PESTECH has secured its second contract award in the Philippines which, in fact, is the first EPCC project there despite the small contract value at RM50m. We see vast potential there, where 30% of the population are without access to electricity supply. Elsewhere, the BOT projectDiamond Power is completing soon next month, which will mark the first recurring income for PESTECH over the next 25 years. We continue to like this alternative power play given its earnings growth story. Maintain OUTPERFORM call at RM2.00/SoP share.

A small contract win. Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd has received a Notification of Award for the Contract from the National Grid Corporation of the Philippines (NGCP) in relation to the Calamba 230kW Substation project for design, supply, installation, testing and commissioning of secondary devices, including construction/erection/integration of NGCP supplied high-voltage equipment. The contract, which is segregated into two separate currency denominations namely: (i) USD5.358m and (ii) PHP332.136m, is worth a total of c.RM50.2m. The contract duration is 540 days and the commencement date of the project will be determined by NGCP later.

Second Philippines contract. We are pleased with this small contract win, which is the second contract secured from NGCP after the first contract won worth RM38m in August last year. This contract marks the first EPCC project for a 230kV Main Substation in the Philippines. Although these two contract values are relatively small, we see potential there as 30% or 28m of its population are without access to electricity supply. We understand that the company will focus on small contracts worth USD10m-USD20m each initially to build its base before looking for sizeable contract, which is the same model when it started venturing into Cambodia. Profit margin for this new contract is still within the range of 10%.

More contracts to come. With this win, its order-book is estimated to be worth c.RM1.5b with earnings visibility up to end-2019. So far, the RM1b worth of domestic electrification contract is not finalised yet. And, we believe that it stands a good chance based on its track record and work capacity. Nonetheless, Indochina remains its main focus and we believe there are few more contracts available for grab there, especially once its BOT project - Diamond Power commences operations by this year-end. For the BOT, this will mark its first recurring income stream over the next 25 years.

OUTPERFORM reiterated. As this contract win is still within our order- book replenishment assumption, we keep our estimates unchanged for now. We continue to like this niche utilities infrastructure play for its earnings growth story. Hence, we maintain our OUTPERFORM rating 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 - 5 Oct 2017