PESTECH secured yet another EPC contract in Cambodia for transmission line and substation project worth USD26m. A proven testimony of its adeptness, Cambodia becomes its main growth area with more contracts up for grab. Besides, PESTECH is seeing its maiden recurring income stream from next month onwards for Diamond Power. We remain OUTPERFORM with an unchanged target price of RM2.00/SoP share for its earnings growth story.

A USD26m EPC contract. Yesterday, PESTECH announced that its wholly-owned Cambodian subsidiary Pestech (Cambodia) Ltd has completed the execution of a contract agreement with Schneitec Co., Ltd, for the EPC of developing a 115kV double circuit transmission line for c.75km ± 3km from Oddor Meanchey to Siem Reap, a 115/22kV Oddor Meanchey substation, and a 230/22kV Bek Chan (Porsenchey) substation at a contract price of USD26m or c.RM106m. The project is expected to start by next month over a period of 18 to 24 months.

Third contract in FY18. With this contract, PESTECH has already secured three contracts in FY18 with a total value of c.RM236m, which include one with TENAGA (OP; TP: RM17.17) and another in the Philippines. As of Sep 2017, its order book was RM1.41b. Thus its order book is likely to rise to c.RM1.5b with earnings visibility of up to end-2019. While it has minimal impact in FY18 earnings, We keep our FY19 estimates as it is still within our FY19 revenue assumptions. This contract raises FY19 revenue to c.RM600m, based on billing progress, against our assumption of RM700m. This also means that it needs another RM100m worth of contracts to meet our expectations for FY19.

More contracts to come. Cambodia remains PESTECH’s prospective growth area given the high expansion of power infrastructure development there. Given it is a preferred EPC contractor for EdC under the private funded projects on the back of its track record, PESTECH should stand a good chance to secure future projects. Meanwhile, the EPC portion for Diamond Power project has completed and energized in October, PESTECH is expecting its maiden recurring income stream to flow in from January 2018 onwards over the next 25 years. Domestically, though the longawaited Gemas-JB double track electrification project has no outcome yet but based on the firm’s track record and its recent M&A of railway contractor Colas Rail System, PESTECH stands a good chance of securing it.

More to offer; OUTPERFORM reiterated. We continue to like this niche utility 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 of Colas Rail System 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 - 20 Dec 2017