After a long hiatus since last year-end, PESTECH has secured its first contract in 2018, worth RM58m, to build a substation near Bintulu for SESCO. While contract flow remains slow for now, its existing order-book should keep it busy for the next 2-3 years. As its share price has remained stagnant despite a rising earnings trend, PESTECH’s valuation is no longer excessive. Thus, our OUTPERFORM rating is maintained at RM2.15/ SoP share for its earnings growth story.

A RM58m substation contract. Yesterday, PESTECH announced that its wholly-owned Pestech Sdn Bhd has accepted a Notification of Award from Syarikat SESCO Bhd, a subsidiary of Sarawak Energy Bhd for the Sibiyu 132/33kV substation project in Kemena Land District for a total contract amount of RM57.95m. Once completed, the project which is located about 35 minutes drive from Bintulu Airport is expected to provide the essential 132kV power injection into the city of Bintulu. The project will start on 3 Sep for a period of 28 months.

First contract in FY19. Since the last contract win of RM106m in midDec 2017, PESTECH had not secured any new contract and this is the first contract in both 2018 and FY19. Although there is lack of contract flow, PESTECH has been busy with its current order-book and we are not worried with its FY19 profitability, as based on billing progress it should be able to meet our earnings estimates. This new contract raises FY19 revenue to c.RM610m, based on billing progress, against our assumption of RM800m. This also means that it needs another RM190m worth of contracts to meet our expectations for FY19, which is not excessive.

Contracts in hand offer 2-3 years earnings visibility. With the cancellation of East Coast Rail Link (ECRL), the KL-Singapore High Speed Rail and Gemas-JB double track projects are the only two major electrification projects locally for PESTECH to participate of which we think the contract sums are fairly big should it able to secure the projects. On the other hand, as the government is looking to upgrade the existing East Coast KTM line to replace the cancelled ECRL project, PESTECH should stand a good chance of securing the project based on its track record on the West Coast KTM line. Meanwhile, its current order-book is estimated at RM1.57b which should keep it busy for at least the next 2-3 years.

A strong 4Q18 expected; OUTPERFORM reiterated. PESTECH is expected to announce its 4Q18 results early next week which we believe will be on track to meet our FY18 estimate of RM92.1m, after posting 9M19 core earnings of RM62.8m. This is premised on stronger Cambodian earnings before the start of the raining season in 2H of 2018. Thus, we keep our FY18-FY19 estimates unchanged for now. 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 two years despite strong earnings momentum. Hence, we maintain our OUTPERFORM rating with an unchanged price target of RM2.15/share (SoP valuation). Risks to our call include: (i) failure to replenish order-book, and (ii) cost overruns.

Source: Kenanga Research - 24 Aug 2018