With a 65% YoY jump, 1HFY20 earnings is on track with our estimate while projects progressing to advanced stage would boost billing with better margin. Its sizeable orderbook of RM1.59b 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.

Weak seasonally, 1HFY20 on track. At 32% of our FY20 estimate, 1HFY20 core profit of RM29.3m met our expectations as 1H is seasonally weak (in the past three years, 1H made up only a quarter of full-year earnings except FY18 at 77% which was mainly due to the inclusion of MRT2 project). In fact, 1HFY20 core profit jumped by 65% from RM17.8m. Meanwhile, there was no dividend declared during the period as expected with cash conserved for expansion.

Sequentially, results affected by higher interest and MI. 2QFY20 core profit contracted 46% to RM10.3m from RM19.0m in the preceding quarter despite revenue inching up 2%. The decline in earnings was due to higher interest cost by 15% or RM1.8m while MI jumped to RM4.1m from RM0.9m in 1QFY20. For project progress, it has completed almost all Cambodian projects except Apex Corp’s Tatay project which was at 55% completion from 54% previously due to the raining season, and it should expedite progress in the next quarter as Cambodia is entering dry season. Back home, progress for JB-Gemas double track was fairly slow with only progress completion inching up by 1% to 12%, currently still at the early stage. Meanwhile, KVDT and MRT2 are both at the mid-way of their completion with the former progress completion increasing to 63% from 58% while the latter was at 46% from 40%.

Advancing to higher stage helped to push better YTD margin.

YoY, 2QFY20 core profit fell slightly to RM10.3m from RM11.6m in 2QFY19, albeit a 7% hike in revenue, primarily due to higher interest expense which jumped 38% or RM4.0m from RM10.6m. Without this, it would have posted better bottom-line as projects were at more advanced stages as compared to a year ago. Key project KVDT had a 25% incremental work done from 38%; MRT2 had 21% more from 25% while JB-Gemas is a new projects. This explained the higher revenue posted over the year. As such, 1HFY20 core profit leapt 65% to RM29.3m from RM17.8m while revenue rose 25% to RM378.2m.

Earnings to accelerate in 2HFY20. After the seasonally weak period of 1HFY20, earnings are set to accelerate in 2HFY20 as key local projects MRT2 and KVDT are advancing to higher stage which fetches better margin as compared to the early stage while the start of dry season in Cambodia should expedite the Tatay project to high speed to make up for the slow progress in the past six months. Meanwhile, the refinancing of existing loan should help to address the issue of high interest cost. Going forth, its current order-book of RM1.59b will keep them busy for the next two years and sustain earnings growth. 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.

Attractive; OUTPERFORM reiterated. 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 Indochina. Post earnings release, we keep our FY20-FY21 estimates unchanged as well as 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 - 24 Feb 2020