PESTECH has secured its third contract award in the Philippines for an EPCC contract worth c.RM94m. We see vast potential there, where 30% of the population are without access to electricity supply. Meanwhile, with the revival of mega transportation infrastructure projects back home, contract awards should start rolling soon. Given its technical capability, PESTECH is likely to stand a good winning chance. Maintain OP at RM1.75.

Won a RM94m contract. Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd had received a Notice of Award from National Grid Corporation of the Philippines (NGCP) for the EPCC contract for Cebu-Bohol 230kV interconnection project for substation portion for a total contract value of c.RM94m which consists of: (i) offshore portion of USD13.89m or c.RM57.7m, and (ii) onshore portion of PHP439.9m or c.RM36.1m. Under the contract, PESTECH will deliver a new 230kV outdoor substation at Bohol as well as 138kV extension works at the existing substation at Bohol with project duration of 450 days.

Its 3rd Filipino project. We are positive with this third contract secured from NGCP with greater contract value, increasing from the c.RM38m Tiwi contract in Aug 2016 and followed by the bigger c.RM50m Calamba contract in Oct 2017. This latest contract value of RM94m almost doubled from the Calamba contract, showing an increasing trend in project value. Profit margin for this new contract is still within the range of 9%-11%. We see vast potential there as 30% or 28m of its population are without access to electricity supply. Meanwhile, we have learnt that PESTECH is currently eyeing another EPCC contract in the country as well.

Order-book of RM1.6b to support earnings growth for the next two year. With this contract win, PESTECH has secured a total of RM132m for FY20 after winning a small Smart Metering contract last month worth RM38.4m from TENAGA. Although almost crossing the half-year mark for FY20, we believe our targeted order-book replenishment of RM750 is not overly optimistic given the upcoming contract flows from KVDT2, LRT3 and ECRL. While there is no indication of contract value size, we believe the combined value of any two of these three rail electrification projects could likely boost its current order-book by 40%-50%, from current size of RM1.6b, should it be successful in the bidding.

Still an alternative attractive utility play; 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. Given the earnings growth potential of 26%/14%, at decent PER of 10x/9x for FY20/FY21, we believe the market has yet to appreciate the growth potential in this stock. While keeping our estimates unchanged, we also maintain our OUTPERFORM 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 - 13 Dec 2019