Pestech International Berhad (Trading Buy)

• PESTECH’s main businesses are in power generation, transmission and distribution, management of related infrastructure, as well as rail electrification and signalling systems.

• After a strong FY21 (ended June 30) performance, when PESTECH achieved a core net profit of RM72.4m (+30% YoY), our fundamental research team is estimating PESTECH would achieve a net profit of RM75.7m (+5% YoY) in FY22 and RM87m (+15% YoY) in FY23, representing forward PERs of 10.3x and 8.9x respectively.

• In terms of corporate development, PESTECH has just announced a bonus issue exercise involving the issuance of 2 bonus shares and 1 warrant for every 8 existing shares held. This is expected to enhance the trading liquidity of the stock.

• Chart-wise, after correcting as much as c.40% from a high of RM1.43 in February this year, the stock has recently found support along the RM0.87 level. Since then, the stock has started to trend upwards gradually in August.

• And following the strong earnings announcement made last Friday, the stock gapped up with the previous day’s candlestick crossing above the 100-day SMA, signalling a probable start of an uptrend ahead.

• The bullish MACD and Parabolic SAR indicators are also showing strengthening momentum in the stock.

• Yesterday’s formation of a long-legged doji candlestick also suggests that any selling pressure has been met by steady buying interest to maintain its current price, thus laying the grounds for an ensuing rally.

• On its way up, we believe the share price could potentially challenge our resistance levels of RM1.15 (R1; 13% upside potential) and RM1.24 (R2; 22% upside potential).

• We have pegged our stop loss at RM0.91 (or an 11% downside risk), offering a risk-reward ratio of 1.18x.

VSTECS Berhad (Trading Buy)

• VSTECS distributes ICT products (ranging from notebooks, PCs, smartphones, tablets) as well as communication infrastructure servers and enterprise software systems.

• In FY Dec 20, VSTECS achieved a net profit of RM37m (+24% YoY) on the back of strong demand for work-from-home (WFH) devices such as laptops and tablets. The strong earnings momentum continued with 1HFY21 net profit surging 64% YoY to RM22.6m.

• Moving forward, VSTECS will likely ride on another source of income growth from the distribution and reselling of cloud services (from the likes of Alibaba) in Malaysia.

• Technically speaking, the stock has been forming an ascending price channel since September 2020.

• With the stock rebounding off the lower boundary of the channel yesterday, and the Heikin Ashi candles showing a potential trend reversal (following the formation of a green candle with long upper and lower wicks yesterday), the price uptrend is expected to persist.

• Furthermore, the stock is currently hovering above the 150-day SMA, lending further support to the price momentum.

• The stochastic indicator is also reversing from an oversold position. Since the emergence of the ascending channel, there has been three occasions where a recovery of the stochastic indicator from the oversold position has resulted in subsequent rallies in the share price. And with the MACD showing a waning downward momentum, we reckon the stock could be staging another rally ahead.

• We have identified resistance levels at RM1.50 (R1; 13% upside potential) and RM1.60 (R2; 20% upside potential).

• We have pegged our stop loss at RM1.19 (or a 11% downside risk), which sits comfortably below the two most recent swing lows.

Source: Kenanga Research - 3 Sept 2021