PESTECH has won a small RM32m EPCC contract for a 230kV substation for a gold mine in Cambodia. COVID-19 is likely to have mild impact as its projects are not restricted under the MCO and still on-going albeit at a slower pace while its Cambodia project is still business as usual. We still like this company for its niche utility infrastructure play. Maintain OP with a revised TP of RM1.15.

A small RM32m contract in Cambodia. Yesterday, PESTECH announced that its wholly-owned subsidiary Pestech (Cambodia) Plc had finalised the contract agreements with Renaissance Minerals (Cambodia) Ltd, for the EPCC contract for the construction of Okvau Gold Mine project 230/11kV Okvau Transmission Substation for USD7.34m or c.RM32m. The gold mine project is owned by Renaissance Minerals’ parent company Australian listed mining firm Emerald Resources NL. The commencement date of the project is 1st of March and shall be completed within 12 months.

6th contract win in FY20. We are positive with this small contract win as it showed its ability to secure international projects. This is its 6th contract win in FY20, totalling YTD contract win to RM412.6m against our targeted FY20 order-book replenishment of RM750m. Given the change of federal government and COVID-19, the timing of the award of HSR, KVDT2, LRT3 and ECRL contracts would be uncertain for now. However, this does not affect our FY20-FY21 assumptions as the current outstanding order-book of c.RM1.6b will sustain earnings growth for the next two years.

COVID-19 likely to have mild impact on project progress. We understand that the local JB-Gemas double track, MRT2 and KVDT projects are still proceeding during this Movement Control Order (MCO) period in accordance to government’s procedure for safety requirements while its Cambodia project is still business as usual. So far, all contracts executions are continuing based on contractual conditions which have clauses to deal with such situation that will be fair for both parties. As such, the pandemic is likely to have mild impact on project progress.

OUTPERFORM maintained. Given the depressed market condition, we switch all our valuation method to PBV with a targeted fair value based on -1SD PBV 5-year mean under our Utilities stock universe. As such, our target price is reduced to RM1.15 based on -1SD PBV 5- year mean of 4.04x, from RM1.75/SoP share previously. Nonetheless, a “business as usual” fair value will be RM1.45 which is based on PBV of 5-year mean of 5.23x. In all, we still 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. Thus, we maintain our OUTPERFORM rating. An ideal entry price is RM0.80 which is based on -2SD PBV 5-year mean of 2.85x. Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 27 Mar 2020