PESTECH registered the strongest first quarter so far which saw 1QFY20 core profit jumping 2-fold YoY to RM19.0m as projects are moving into advanced stages which fetch better margins. Its sizeable order-book of RM1.5b will sustain its earnings growth story for the next two years while domestic contract flows such as KVDT2, LRT3 and ECRL should keep PESTECH on investors’ radar. We keep our OP call and TP of RM1.75.

A good start for FY20. PESTECH reported a satisfactory set of 1QFY20 results which matched expectation with core profit jumping 2- fold YoY to RM19.0m which made up 21% of our FY20 estimates. 1H of the financial year is seasonally softer and we expect earnings to pick up in the 2H. Meanwhile, there was no dividend declared during the period as expected as it keeps cash for expansion.

A seasonally soft quarter sequentially… 1QFY20 core profit contracted 43% QoQ to RM19.0m from RM33.5m in the preceding quarter while revenue declined 34%. The decline in earnings was not unexpected given the seasonality factor. Project progress was on track with the first Alex Corp’s project at 90% completion in 1QFY20 as compared to 84% three months ago but the second project was maintained at 54% completion, making way for the first project to expedite progress. The other Cambodian project Oddor Meanchey is at the tail-end with 98% completion from 92% earlier. Meanwhile, the two big local projects namely KVDT and MRT2 are at midway of completion with the former 58% completed vs. 54% in 4QFY19 while the latter had progressed by 5% to 40%.

… but the strongest first quarter so far. YoY, 1QFY20 core profit soared 2-fold to RM19.0m from RM6.2m on the back of 51% jump in revenue to RM187.4m from RM124.1m. This was largely attributable to higher job claims for local rail electrification project and Cambodian projects compared to last year on the back of projects moving to more advanced stage, fetching higher margins. As such, it posted higher pretax margin of 13% in 1QFY20 as opposed to 10% in the correspondingly period last year.

Earnings are set to accelerate in 2HFY20. Although 1H is a seasonally weak period, the outstanding order-book for Cambodian projects, which is mostly at the final stage of completion, only accounted for 17% of the group’s current order-book of RM1.50b as at Sep 2019. As such, we believe the seasonal earnings gap could not be that apparent as compared to previously when the Cambodian projects made up half of order--book while the local MRT2 and KVDT works are advancing to higher stages, which are likely to mitigate the shortfall. The RM1.5b order-book should keep them busy for the next two years. In addition, we expect contract flows to start kicking in with the revival of KVDT2, LRT2 and ECRL. PESTECH should stand a good chance of participating in these projects as it is the only local firm with rail electrification expertise.

Still attractive; OUTPERFORM maintained. We continue to like 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. Post earnings release, while we keep our FY20-FY21 estimates unchanged. We also maintain our OUTEPERFORM rating and target price of RM1.75/SoP share. Risks to our call include: (i) failure to replenish order-book, and (ii) cost overruns.

Source: Kenanga Research - 29 Nov 2019