2Q18 results came in strong, beating expectations with revenue at a record high of RM278.0m, thanks largely to the two rail projects, namely KVDT and MRT2. With the inclusion of MRT2 following the acquisition of Colas Rail last October, order-book is at a new high of RM1.88b. Hence, we upgrade FY18/FY19 estimates by 12%/15% and target price to RM2.15/share. It remains an OUTPERFORM for its exciting earnings growth story.
2Q18 above expectation. Although making up 44% of our FY18 estimates, we consider 1H18 core profit of RM36.1m as above our expectation given that 2H is always a stronger period while the latest 2Q18 results reflected contribution from the MRT2 following the acquisition of Colas Rail’s business in Malaysia in end-October last year. The stronger-than-expected 2Q18 core profit of RM24.2m was largely due to the contributions from MRT2. There was no dividend declared in 2Q18 as expected.
Strong earnings led by rail projects. 2Q18 core earnings doubled to RM24.2m, from RM11.9m in 1Q18, on the back of 50% hike in revenue. In fact, 2Q18 revenue of RM278.0m was a record high. The strong earnings were largely attributable to rail projects, namely KVDT and MRT2. Meanwhile, contributions from Cambodia were less given the raining season there. In addition, the Diamond Power’s (DPL) EPC contract was at its tail-end, which was completed in end-October while the two main Alex Corp’s contracts were still at the beginning stages.
Same reason for YoY comparison. Likewise, both 2Q18 and 1H18 core earnings leapt 60% and 56% from RM15.1m and RM23.2m, respectively, on the back of 132% and 108% jump in revenues. This was primarily driven by the two rail projects mentioned above. To note that, back then, the Alex Corp job slowed down in 1Q17 pending the upgrade of 500kV transmission line which was subsequently awarded in early February last year or 3Q17 in PESTECH’s financial period.
Expecting seasonally strong 2H18. As it is entering the busy period in Cambodia as work progress is expected to be ramped up in the dry season, coupled with the inclusion of MRT2, PESTECH is set to witness a seasonally strong 2H18. Its current order-book of RM1.88b after the inclusion of MRT2 will keep it busy for the next 2-3 years. With MRT2, we raised our FY18/FY19 estimates by 12%/15% as revenue assumptions are upgraded to RM720m/RM800m from RM650m/RM700m previously. This is on the back of RM1.0b/RM1.1b order-book replenishment assumptions.
Exciting time ahead; reiterate OUTPERFORM. Post-earnings revision, we upgrade our target price to RM2.15/SoP share from RM2.00/SoP share for the same CY18 valuation basis. 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 two 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. Risks to our call include failure to replenish orderbook and cost over-runs.
Source: Kenanga Research - 26 Feb 2018
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