We recently visited Nestcon Berhad (Nestcon) which is an infrastructure and building construction specialist. To recap, Nestcon was listed on 29 June 2021 and we had a BUY call with target price of RM0.39. Key takeaway from the meeting was positive on its new venture into renewable energy and recent infrastructure contracts won. We expect Nestcon to register net profit of RM26.9M and RM34.15m for FY23 and FY24 respectively. BUY with a target price of RM0.64 based on 12x PER FY23f (conservatively discounted to its local peers’ average of 14x FY23 forward PER).

Nestcon had on 15 September 2021 set up a 70:30 joint venture (JV) with Hatten Commercial Management Sdn Bhd to install 6,373 solar panels on the roof of the Dataran Pahlawan Melaka Megamall generating up to 3.19MWp (megawatt peak) of solar-powered energy in Melaka. This marked the first renewable energy project which Nestcon had secured as an EPCC with contract size of RM7m generating a potential recurring cash flow of RM1.2m per annum. The JV will also jointly collaborate with other potential partners to utilise and/or secure the current and future land reserve for building large-scale solar photovoltaic facilities to generate up to 100MWp by phases in Malaysia.

Nestcon via its subsidiary, Nestcon Infra Sdn Bhd had on 12 Jan 2022 accepted 2 letters of award by China Communications Construction (ECRL) Sdn. Bhd. The awarded sub-contracts named Project S1-1 and Project S1-2 are infrastructure works for the construction and completion of subgrade works under the East Coast Rail Link project in Kota Bharu, Kelantan with contract sums of RM44.98m and RM45.42m respectively. We expect more infrastructure projects to be rolled out in 2022 as there are few mega projects in the pipeline under 12MP such as MRT2, domestic high-speed rail, Penang Transport Master Plan and Serendah Port Klang Rail Bypass.

The company has a healthy orderbook of RM2.1bn with unbilled orderbook of RM1.2bn which could last for next two to three years. Moreover, we take comfort from the management that labour shortage issue will be solved by 1Q2022. Our recommendation is based on: (i) new income stream from renewable energy (ii) large tenderbook of RM3bn with 15% to 20% success rate; (iii) potential job wins from more infrastructure projects rollout and (iv) strong relationship with reputable property developers.

Source: Rakuten Research - 19 Jan 2022