We are positive on PESTECH’s acquisition of French railway contractor Colas Rail’s business in Malaysia, which provides immediate involvement in the MRT2 rail electrification work; a good reference for its future bidding both locally as well as regionally. We continue to like this alternative power play given its earnings growth story. Maintain OUTPERFORM call at RM2.00/SoP share.

A RM10.4m M&A deal. Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech Technology Sdn Bhd has entered into agreements to acquire the entire 100% stake in Colas Rail System Engineering Sdn Bhd (CRSE) for RM10.4m from the parties of: (i) Colas Rail Asia Sdn Bhd and Colas Rail, and (ii) Vital Bid Sdn Bhd. CRSE is involved in the EPC for railway electrical and mechanical projects. The parent company Colas Rail SA is a French company involved in building railway infrastructure projects worldwide. This is not the first-time PESTECH is acquiring a competitor as it also acquired rail infrastructure equipment from Balfour Beatty Rail Ltd in April 2015 to boost its rail electrification business.

MRT2 electrification job in hand? To recap, PESTECH lost its bid for the MRT2 rail electrification job to CRSE in July 2016 where the latter was awarded a RM693.03m contract from MRT Corp for system work package SY205 for the EPCC of power supply and distribution system for the SSP Line. As CRSE is the contract owner, we believe PESTECH is technically taking over the job since CRSE is now 100% owned by PESTECH. Although there is no disclosure on the basis of the RM10.4m acquisition, we believe the price is justified by the fact that this MRT2 job is a good reference for PESTECH to bid for future tender.

A good reference for future bidding. There are many rail infrastructure systems are expected to come up within the ASEAN region in the future; so far, only Singapore and Malaysia have the mass transportation system while there is no local ASEAN rail electrification company except PESTECH. As such, we believe the potential from this region is huge, especially in mega cities such as Jakarta and Bangkok. Domestically, this would also boost its chance of getting the long-awaited Gemas-JB double track job and the upcoming KL-Singapore High Speed Rail as well as East Coast Rail Line projects.

More to offer; OUTPERFORM reiterated. As we expect minimum impact to FY18E numbers from this acquisition, which is also within our revenue assumption for FY19, we keep our FY18-FY19 estimates unchanged for now. We continue to like this niche utilities infrastructure play for its earnings growth story. In fact, its valuation is no longer excessive following the lacklustre share price performance in the past 1.5 years while earnings momentum remains strong. With the exciting acquisition coupled with busy contract flow from Cambodia, we believe it is currently good timing to look at this attractive stock. Hence, we maintain our OUTPERFORM rating with an unchanged price target of RM2.00/SoP share.

Risks to our call include (i) failure to replenish order book and (ii) cost overruns

Source: Kenanga Research - 31 Oct 2017