We cut our FY23 net profit forecast by 25% and lower our TP by 24% to RM0.66 (from RM0.87) based on unchanged FY23E PER of 12.4x, which is at a 20% discount to the average prospective PER of 15.5x for international peers of Siemen and ABB, to reflect its significant smaller size, partially compensated by its greater growth potential and a leaner setup. Maintain Outperform.

The key takeaways from our recent engagement with PESTECH are as follows:

1. The company guided for lower revenues of RM700m- RM750m in FY22-FY23 (vs. RM900m-RM1.0b previously) given the challenging market conditions, such as slowdown in activities and award of new jobs;
2. It also guided for the PAT margin to ease to 5%-7% (from 9%-11% normally) given that the rising cable and copper costs - which typically in combine make up 15%-20% of contract value - have risen by 30% YTD;
3. Under the current volatile input cost environment, the company is gravitating towards cost-plus new contracts to shield it from margin erosion experienced at its existing projects, especially transmission line and substation projects; and
4. Meanwhile, the prospects of the industry over the medium term remains positive, underpinned by several rail electrifications projects in the region such as new metro system in the Philippines and the new Orange Line in Bangkok. We understand that the tender outcome will be announced soon for one metro project in the Philippines which is worth c.USD100m-USD150m. Back home, the ECRL’s electrification part of the project valued at c.RM300m has yet to be announced. All these are the potential jobs that PESTECH are interested to participate.

A soft patch over the immediate term. Cost pressure and weak billings may persist into the next few quarters but the start of KLIA aerotrain in 4QFY22 should help to gradually improve earnings. Its orderbook as of Mar 2022 at RM1.93b will keep them busy for the next 2-3 years. While keeping FY22E revenue and FY22E-FY23E project operating margins, we lowered FY23E revenue assumption to RM750m from RM1.05b which led us to cut FY23 net profit forecast by 25% to RM52.5m with FY22E net profit estimate unchanged at RM50.6m.

OUTPERFORM maintained. The soft patch aside, 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.

Risks to our call include: (i) failure to replenish order-book, and (ii) cost overruns.

Source: Kenanga Research - 16 Jun 2022