The slow start to 1Q18 was well expected on seasonality while earnings are expected to pick up in the coming quarters. With the completion of BOT this month, PESTECH will see its maiden recurring income in 2H18. 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.

1Q18 within expectation. Although making up only 15% of our FY18 estimate, 1Q18 core profit of RM11.9m is deemed as within our expectations as first quarter is always a weak quarter. The two main current Alex Corp’s projects - the 500kV upgrading job and Stung Tatay contract - are all at the beginning stages, thus generating lower job progress claims. Nevertheless, earnings should pick up in the coming quarters. No dividend was declared in 1Q18 as expected.

A seasonally weak quarter. Despite revenue surging 61% to RM184.9m, 1Q18 core profit plunged 73% sequentially from RM42.4m in 4Q17, which was largely due to; (i) higher-than-expected financial income from Diamond Power (DPL) amounting to RM21.5m in 4Q17, and (ii) the two main Alex Corp’s contracts mentioned above still at the beginning stages.

The strong revenue growth in 1Q18 was largely due to the matching of revenue against the recognition of material purchase for the two Alex Corp’s projects while typically at this stage of billings provide low margins. This also explains why top-line grew substantially but bottomline did not grow as much.

However, a better quarter than last year. On a YoY comparison, 1Q18 jumped 48% to RM11.9m from RM8.1m in 1Q17, as revenue surged 80% owing to the reason mentioned above. The better earnings posted in 1Q18 was attributable to higher level of work recognition as opposed to last year. Back then, the Alex Corp’s job slowed down in 1Q17 pending the upgrade of 500kV transmission line which has been done.

The start of recurring income in 2H18. Although 1Q18 results were slow given the seasonality effect, we expect a better 2Q18 before a strong 2H18, as work progress will be back in full swing in the dry season in Cambodia. On the other hand, the completion of DPL in early this month and earnings are expected to reflect from 3Q18 onwards. This will mark its recurring income-stream over the next 25 years. Meanwhile, its current order-book which stands at c.RM1.41b will keep PESTECH busy up to end-2019. In all, we keep our FY18-FY19 estimates unchanged for now.

Reiterate OUTPERFORM. 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. We believe more contract flows are set to kick in, which should act as share price catalysts. It remains an 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 - 27 Nov 2017