Being the only local firm with rail electrification capability, PESTECH stands a good chance of grabbing the revive infrastructure contracts. We believe it is time to buy into this niche utility infrastructure play which could potential benefit from the revival of mega projects domestically and the fast-growing energy infrastructure development market in Cambodia. BUY with a TP of RM2.00 given the improved contract flows premised on 14.5x PER which is closer to its 3-year mean. 

PESTECH caught market’s attention again in the past few days which saw its share price rallying 23% since the beginning of July with heavy volume traded. We believe this could be due to the revival of KVDT2 and ECRL. On Monday, the Transport Minister said there is a relaunch ceremony for ECRL on 25 July, which has been put on hold since July 2018, as terms of construction were being renegotiated. 

The Minister further reiterated that the KVDT2 is restored to its original contractor Dhaya Maju Infrastructure Asia and LTAT at a new value of RM4.47bn from RM5.26b previously. This is definitely good news for PESTECH as it stands a good chance given its technical capability. Also, PESTECH won the KVDT Phase 1 worth RM318m in Mar 2016. 

While there is no indication of contract value size, we believe the combined value of these two rail electrification projects could likely boost its current book of RM1.8bn by 40%-50% should it be successful in the bidding. 

To recap, after a weak set of 1H19 results, which was well expected on seasonality, PESTECH raked in a solid 83% sequential jump in core profit to RM21.2m in 3Q19. We are expecting even stronger net profit of RM35m-RM40m in 4Q19 as Cambodian jobs are rushing to meet timeline before the rainy season in 1H20. In fact, Alex Corp’s extension contract is at the tail-end stage where the project is due for completion in 1H20; as such, we expect acceleration in work progress just before the wet season arrives. 

Meanwhile, the local rail electrification projects, such as KVDT and MRT2 are progressing well and should help to push up job claims. For now, we believe our FY19-FY20 net profit estimates of RM79.6m and RM104.2m are achievable. 

Source: Rakuten Research - 10 Jul 2019