We cut our FY15-17 (Jun) earnings forecasts by 14%, 23% and 8% respectively to factor in a soft patch in the piling segment. We also cut our TP by 7% to MYR4.60 (11% upside) but maintain our BUY call. The prospects for the piling segment are strong, backed by infrastructure and high-rise projects, and Pintaras Jaya is a good proxy given its dominant position as one of the Top 5 piling contractors in Malaysia.

• Refocusing on growing orderbook. Pintaras Jaya has resumed more active participation in the bidding for new jobs since January. The company was not able to do so previously as it had to channel additional resources towards the execution of a few projects that turned out to be more challenging than it had expected. Pintaras Jaya’s outstanding orderbook should gradually rise from MYR100m at present, backed by a tenderbook of MYR500m.
• A temporary excess supply situation. Pintaras Jaya also acknowledged that the piling market may be bracng for a temporary excess supply situation over the next 6-12 months. This is due to the completion of the Mass Rapid Transit 1 (MRT1) and Light Rail Transit 2 (LRT2) works, while the MRT2 and LRT3 projects will not start work until 1Q16 at the earliest.
• Forecasts. We cut our FY15F-17F earnings by 14%, 23% and 8% respectively, largely to factor in a soft patch in the piling segment over the next 6-12 months.
• Risks. These include: i) Pintaras Jaya’s ability to constantly secure new jobs, and ii) an escalation in input costs.
• Maintain BUY. The prospects for the piling segment are strong, backed by: i) the MRT2 and LRT3 projects, and ii) a proliferation of high-rise developments amid rising land scarcity in prime locations that require extension piling. Pintaras Jaya’s key strengths are: i) its full range of piling machines, tools and accessories; ii) its ability to improvise piling solutions for diverse ground conditions given its experience spanning more than two-and-a-half decades in the local piling sector; and iii) its ability to secure cash discounts for key inputs, given its strong balance sheet. We cut our TP by 7% to MYR4.60 (from MYR4.92) based on 13x 2016 EPS of 35.4 sen, in line with our 1-year forward target P/E of 10-16x for the construction sector.

A Soft Patch Ahead A “breather” in earnings growth. Following a meeting with the company recently, we now hold a view that Pintaras Jaya may be taking a “breather” after five consecutive years of earnings growth. Its core earnings almost tripled to MYR53m in FY14 from MYR18.5m in FY09, translating into a CAGR of 23.4% (see Figure 1). We believe Pintaras Jaya’s earnings prospects over the next 6-12 months (4QFY15 included) will be a shade paler than what we had expected. This is because it takes time for the company to replenish its depleting orderbook. The piling market may also be bracing for a temporary excess supply situation over the next 6-12 months, given the completion of the MRT1 and LRT2 projects, while MRT2 and LRT3 works are not slated to begin until 1Q of 2016 at the earliest.

Refocusing on growing orderbook. Since January, Pintaras Jaya has resumed a more active participation in the bidding for new jobs. The company was not able to do so previously as it had to channel additional resources towards the execution of a few projects that turned out to be more challenging than it had expected. The challenges came from: i) ground conditions (including a previous dump site as well as limestone formation beneath the ground at two other sites), and ii) the need to comply with very stringent requirements set by a particular project’s foreign consultants. Pintaras Jaya is currently bidding for various projects worth a total of MYR500m. Assuming it wins some of them, its outstanding orderbook should gradually rise from the MYR100m at present (see Figure 2). At MYR100m, the company’s current backlog may only last for 2-3 quarters and is only at about 40% of its recent peak ofMYR295m in Apr 2014. Depending on Pintaras Jaya’s ability to optimise the utilisation of its fleet of machines, ie by securing jobs that match the specification and capability of its un-deployed machines or machines that are about to be decommissioned from an existing job, the company could carry jobs worth up toMYR300m in its orderbook at any one time.

Also, given the typically short duration of piling jobs, ie 6-12 months, Pintaras Jaya’s outstanding orderbook is a moving number and tends to fluctuate more vis-à-vis those of a general contractor. This is because general construction contracts, such as infrastructure and building jobs, normally take 24-36 months to complete. In our earnings forecasts for Pintaras Jaya, we project a construction turnover of about MYR200m in FY16, which implies job wins of at least MYR150m-200m during this period.

A temporary excess supply situation. Pintaras Jaya also acknowledged that the piling market may be bracing for a temporary excess supply situation over the next 6-12 months. This was due to the completion of the MRT1 and LRT2 projects. Furthermore, works for MRT2 and LRT3 are not slated to begin until 1Q16 at the earliest. A new MRT or LRT project could be a big swing factor to the piling and foundation services segment, ie worth about MYR3bn-3.5bn annually based on our estimates. Typically, piling and foundation works make up about 15% of total value of an infrastructure project. As such, depending on the exact timing of the MRT2(MYR28bn) and LRT3 (MYR9bn) projects, they will generate demand for piling and foundation services worth MYR4.2bn and MYR1.35bn respectively, triggering another round of acute shortage of piling capacity in the market.

Forecasts. We cut our FY15-17 earnings forecasts by 14%, 23% and 8% respectively. This is to largely factor in the expected soft patch in the piling segment over the next 6-12 months.

Risks. These include: i) Pintaras Jaya’s ability to constantly secure new jobs, and ii) an escalation in input costs.

Maintain BUY. The prospects for the piling segment are strong, backed by: i) the MRT2 and LRT3 projects, and ii) a proliferation of high-rise developments amid rising land scarcity in prime locations that require extension piling. Pintaras Jaya’s key strengths are: i) its full range of piling machines, tools and accessories; ii) its ability to improvise piling solutions to diverse ground conditions (given its experience spanning more than two-and-a-half decade in the local piling sector); and iii) its ability to secure cash discounts for key inputs, given its strong balance sheet. As at 31 Mar 2015, it had liquid assets (87% cash and 13% portfolio investment managed by external fund managers) worth a total of MYR184.5m, or MYR1.14/share. We cut our TP by 7% to MYR4.60 (from MYR4.92), based on 13x 2016F EPS of 35.4 sen, in line with our 1-year forward target P/E of 10-16x for the construction sector.