PESTECH has clinched two contracts from TENAGA cumulatively worth RM281m for a substation project in Kedah and an underground cable job in Kuala Lumpur. The stock rebounded 23% in the past one month from a plunge of 42% in 2018, which took its PER to a new low of 8x. With an order-book of RM2.3b keeping it busy till 2021, it should be able to post a record FY19. Maintain OP at RM1.45/SoP share for its earnings growth story.

Clinched two TENAGA contracts worth RM281m. Last Thursday, PESTECH announced that its wholly-owned subsidiary company, Pestech Sdn Bhd had secured two separate contracts from TENAGA (OP; TP: RM16.45) for: (i) a PMU 500.275kV Junjung (3x1050 MVA) substation in Kedah worth RM168.4m for a contract period of 2.5 years, and (ii) through Pembinaan Tajri Sdn Bhd-Pestech Sdn Bhd JV, a RM112.5m contract for double circuit 275kV XLPE underground cable from PMU Prince Court to PMU Ampang for the contract period of two years.

A major underground cable job. This is definitely positive for PESTECH as the RM112.5m underground cable contract is PESTECH’s biggest underground cable project so far and is a good future job reference. The cable system is to deliver a minimum of 500MVA power for each 275kV cable circuit under the project. On the other hand, the Junjung substation is required to facilitate heavy power transfer from Perak to Prai area through several transformers and lines to the Northern Region. With these two TENAGA’s contracts, PESTECH has secured five contracts worth RM812.8m in FY19 and brought the current order-book to c.RM2.3b which will keep it busy for at least the next 2-3 years.

On track to a record FY19. To recap, PESTECH registered a slow start to FY19 with core profit of RM6.2m only making up 7% of our FY19 full-year estimate, owing to early construction stages for MRT2 and KVDT as well as lower job claims from the Cambodian projects given the raining season there. However, we should see better quarters for the rest of FY19 as the local projects are progressing towards an advanced stage while the Cambodian projects are at full stream in dry season in 2HFY19. With the targeted revenue of RM1b in FY19 and 9-11% net margin, we believe our FY19 net profit estimate of RM90.8m is not excessive and achievable.

Still attractive; OUTPERFORM maintained. After a dismal share price performance in 2018 which saw a plunge of 42%, PESTECH rebounded 23% in the past one month as the stock was traded down to an attractive CY19 PER of 8x in end-2018. Even at current price of RM1.22, the stock is still trading at an undemanding PER of 9.5x. As such, we maintain our OUTPERFORM rating with an unchanged price target of RM1.45/SoP share for this niche utility infrastructure play mainly for its earnings growth story. Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 4 Feb 2019