PESTECH has clinched yet another contract, within two weeks. This time, it is an Asian Development Bank funded project in PNG worth c.RM70m. This is positive as it is a good reference project with secured payment. We believe contract flows will not stop here as there are four major rail electrification tenders domestically in the pipeline. Given its technical capability, PESTECH is likely to stand a good winning chance. Maintain OP at RM1.75.

Secure RM70m contract in PNG. Last Friday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd through PestechYongfu JV has received a Letter of Acceptance for Award from PNG Power Ltd (PPL) for the EPC contract for PPL’s Port Moresby System Study and 11kV Distribution Upgrade for a contract price in the aggregate of USD17.03m or c.RM70.5m. This project is funded by the Asian Development Bank (ADB) jointly with the government of Papua New Guinea (PNG) through international competitive bidding process in accordance to ADB’s bidding procedures. The commencement date of the project will be determined later.

An ADB funded project. We are positive with this win as it was secured through international competitive bidding which shows that PESTECH’s technical credentials matched international standards. Moreover, payment default is low since the project is funded jointly by ADB. This is the 3rd project awarded by PPL since 2008, including a c.USD12.7m EPCC for KilaKila substation and transmission line project in 2016. It has established a subsidiary Pestech (PNG) Ltd in 2016 to address the local requirements in undertaking projects in Port Moresby, the largest urban centre in PNG where its energy sales growth is expected to accelerate over the next 10-15 years.

Contracts keep flowing. This is its 2nd contract win in two weeks, after the c.RM94m EPCC project in the Philippines and is also the 3rd project win for FY20, totalling YTD contract win to RM202.7m against our targeted order-book replenishment of RM750m. We believe the contract flow will not stop here. Just last week, the Prime Minister said that the KL-Singapore HSR is to go ahead albeit at a lower cost. As such, there are at least four mega transportation infrastructure projects, as such HSR, KVDT2, LRT3 and ECRL, in the near term for PESTECH to bid for the rail electrification packages. Meanwhile, its current order-book of RM1.6b will support earnings growth for the next two years.

An alternative 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 11x/10x 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 - 23 Dec 2019