• Maintain NEUTRAL and MYR1.59 TP, 6% upside and c.4% FY24F (Mar) yield. Post-briefing, we view IJM Corp’s 44.8% subscription in the shares of Pestech International (PEST MK, NR) as easing some of the latter’s cash flow hurdles. Notwithstanding this, we reiterate our opinion that it may take some time before PEST can meaningfully contribute to IJM. We think that the stock is fairly valued – trading near its 5-year mean P/E, premised on the group’s current low orderbook level of MYR5.1bn vs MYR9.4bn (end FY18).

• Based on our assessment of PEST’s earnings trajectory, it may reach breakeven in FY27 (Jun) the earliest. Its 9MFY23 (Jun) core net loss stood at MYR30m. We preliminarily estimate a core net loss of MYR26m, MYR13m and MYR2m for FY24F-26F – to incorporate conservatism on its turnover trend (9MFY23: MYR329m vs 9MFY22: MYR583m) combined with elevated operating expenses. This would hypothetically result in a 1-2% downward revision to our current earnings estimates based on IJM’s 44.8% shareholding provided that the subscription of shares by IJM goes through by 4QCY23 (3QFY24 for IJM).

• Despite the time taken for PEST to reach profitability, we take the view that IJM’s interest in the former is long term, banking on adjacent verticals such as rail electrification and transmission lines. This includes overseas opportunities such as the transmission line concession in Cambodia which PEST has experience in addition to pursuing rail projects as a combined civil and systems contractor whereby the Malaysian rail system projects are mainly dominated by foreign contractors. The size of contract value that both parties can bid for can be potentially scaled up – through the offering of comprehensive turnkey solutions for local and international rail projects given PEST’s overseas exposure in the Philippines, Thailand, West Africa and Papua New Guinea.

• Earnings and valuation. We make no changes to our estimates pending the deal completion expected in 4QCY23. The deal is also conditional upon being granted exemption for a mandatory take-over offer (MTO) subject to the approval by independent PEST shareholders with voting shares/rights at an extraordinary general meeting of relevant class of voting shares/rights to waive their rights to receive the MTO. We also do not ascribe any value accretion to our SOP valuation at this juncture. As such, our SOP-derived TP of MYR1.59 is maintained after ascribing a 0% ESG premium.

• Key risks to our call include a slower-than-expected/faster-than expected job replenishment trend and a longer/shorter turnaround time for PEST.

Source: RHB Research - 26 Jul 2023