Despite already surged 23% since the beginning of this month, we believe there is still upside as the revival of mega transportation infrastructure projects will continue fuel the momentum. Being the only local firm with rail electrification capability, PESTECH stands a good chance of grabbing such contracts. In addition, we expect a strong 4Q19 to keep its growth story on track. Keep OUTPERFORM with a revised target price of RM2.00.

Strong price rally. PESTECH caught market’s attention again in the past few days which saw its share price rallying 23% since the beginning of July with heavy volume traded. We believe this could be due to the revival of KVDT2 and ECRL as well as market anticipating a strong upcoming 4Q19 to cap FY19. Share price of PESTECH was suppressed in 2018 owing to weak results on seasonality coupled with lack of sizeable contract wins to build forward earnings momentum back then. This was partly due to delayed contracts awards as the new government was renegotiating all the mega projects to cut costs. As it has been a year since the new government took over, we should see more contracts to keep rolling.

ECRL and KVDT2 are restored. On Monday, Transport Minister said there is a relaunch ceremony for ECRL on 25 July, which has been put on hold since July 2018, as terms of construction were being renegotiated. Meanwhile, during a Question Time in parliament session yesterday, the Minister said the KVDT2 is restored to its original contractor Dhaya Maju Infrastructure Asia and LTAT at a new value of RM4.47b from RM5.26b previously. This is definitely good news for PESTECH as it stands a good chance given its technical capability. And also, PESTECH won the KVDT Phase 1 worth RM318m in Mar 2016. While there is no indication of contract value size, we believe the combined value of these two rail electrification projects could likely boost its current book of RM1.8b by 40%-50% should it be successful in the bidding.

Expecting a strong 4Q19. To recap, after a weak set of 1H19 results, which was well expected on seasonality, PESTECH raked in a solid 83% sequential jump in core profit to RM21.2m in 3Q19. We are expecting even stronger net profit of RM35m-RM40m in 4Q19 as Cambodian jobs are rushing to meet timeline before the raining season arrives in 1H20. In fact, Alex Corp’s extension contract is at the tail-end stage where the project is due for completion in 1H20; as such, we expect acceleration in work progress just before the wet season arrives. Meanwhile, the local rail electrification projects, such as KVDT and MRT2 are progressing well as they advance to a higher stage within the initial stage which should help to push up job claims. For now, we believe our FY19-FY20 net profit estimates of RM79.6m and RM104.2m are achievable.

Let’s ride on the bandwagon; TP upped to RM2.00. After three years of dull price performance, we believe it is time to buy into this niche utility infrastructure play which could potentially benefit from the revival of mega projects domestically and the fast-growing energy infrastructure development market in Cambodia. Given the improved contract flows, we revised our targeted PER for EPCC business to 14.5x, which is the 3-year average (from -1SD 3-year mean of 11x), and we have also rolled over our valuation base-year to FY20 from CY19. This raises our SoP-led target price to RM2.00 from RM1.40. Even at RM2.00, PER valuation is still not demanding at 14.6x which is closer to its 3-year mean. OUTPERFORM maintained. Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 10 Jul 2019