Investment Merits

• A record construction outstanding orderbook of MYR2.1bn to keep the company busy for the next 4-5 years

• Value accretive SEP acquisition to offer stable earnings and cash flow stream via its UNIMAP hostel concession

• SKIP is still on the drawing board – any approval ought to be immediate catalysts to the company’s share price

Company Profile

Pesona Metro started from humble beginnings in 1996 as a subcontractor. Since then, the company has grown from strength to strength to become a prominent and sustainable builder, with a reputation for quality work that adds value to its stakeholders. In 2012, the company was listed on the Main Market of Bursa Malaysia via the reverse takeover of Mithril.

Highlights

Record outstanding orderbook of MYR2.1bn. In tandem with the country’s infrastructure boom, Pesona Metro’s job wins gathered pace in 2015 after it secured MYR584m in new contracts, a YoY doubling. This positive momentum extended into 2016, with new order wins amounting to MYR1.55bn. Meanwhile, the company’s outstanding orderbook stands at a record high of MYR2.1bn as at 1 Jan. This implies a superior cover ratio of 5.4x, which has prompted management to be selective in bidding for new jobs. We have prudently assumed MYR500-600m in FY17-18 respectively, way below the level achieved in FY16.

Incoming hostel concession a cash cow. In Feb 2014, Pesona Metro was awarded a construction contract to build the hostel at University Malaysia Perlis (UNIMAP) valued at MYR129.8m by SEP Resources SB (SEP). The company subsequently entered into a share sale agreement to acquire SEP – which eventually became a concessionaire of the hostel – from its two individual bumiputera vendors in Aug 2014. The price was set at MYR29.2m, comprising: i. MYR27.2m via the issuance of 39.5m new Pesona Metro shares at MYR0.70 per share in two phases (70% in Phase 1 and 30% in Phase 2); ii. MYR1.5m in cash. The company obtained shareholders’ approval for the proposed acquisition of SEP in Dec 2016. Meanwhile, Phase 2’s acquisition is still subject to the Public Private Partnership Unit’s (UKAS) approval. Thus we have only assumed for the 70% acquisition to be completed by end- 1Q17 in our model. We have ascribed a DCF value of MYR107.3m for the entire SEP acquisition.

Serdang-Kinrara-Putrajaya Expressway (SKIP) on the drawing board. In Apr 2015, Pesona Metro made a clarification to Bursa Malaysia after Starbiz published an article that speculated the firm (30% stake) and Putrajaya Perdana (70% stake) – via Saluran Arena SB (Saluran Arena) – may be in the verge of securing an unnamed highway concession in the Klang Valley worth more than MYR2.1bn. Although Pesona Metro has denied signing any concession agreement that warranted immediate public disclosure, we think something is brewing. Putrajaya Perdana’s website lists the privatisation of SKIP under a future launch. We believe the Starbiz article refers to this expressway. Any official award of the expressway concession would definitely be a positive catalyst for the stock, as it may add a new income stream to Pesona Metro. It would also top up MYR630m into an orderbook that is already at a record high. The MYR630m is based on a theoretical 30% stake in Saluran Arena.

Company Report Card

Latest results. Pesona Metro posted net profit of MYR20m in FY16, up 71.3% YoY. That said, we expect the company to almost double its profit again in FY17. This is thanks to a record construction orderbook and contributions from SEP.

Balance sheet/cash flow. The company slipped into marginal net gearing of 0.07x in FY16. However, robust cash generation plus potential repayment of the amount owed by Budaya Positif SB upon its stage one acquisition may see Pesona Metro returning back into a net cash position.

ROE. As we expect a sharp surge in earnings in the coming years, we expect its ROE ratio to move up into the 20s from the teens currently.

Dividend. Despite having no fixed dividend policy, the company has been paying out more than 50% of its profit as dividends. Therefore, we have assumed a generous payout ratio of 50% moving forward.

Management. Pesona Metro is spearheaded by two brothers, Mr Wei Hock Beng and Mr Wei Hock Kiong. The two hold an aggregate 57.3% stake in the company. The former is the founder and current MD, with over 24 years of experience in the construction industry.

Recommendation

We like Pesona Metro, as it offers direct exposure to the booming infrastructure construction sector in Malaysia through its MYR2.1bn record orderbook. This could keep the company busy for the next 4-5 years. Separately, the conclusion of SEP’s acquisition ought to offer stable earnings and cash flow stream via UNIMAP’s hostel concession. We also suspect that the SKIP expressway is still on the drawing board, and any approval for this would be immediate catalysts for Pesona Metro’s share price. This is because its offers another stream of stable earnings and lifts its outstanding orderbook, which is at a MYR2.1bn record high. Meanwhile, we derive a FV of MYR0.80 for this counter by valuing the company’s construction and manufacturing earnings at 12x FY18F P/E, and include 70% of SEP’s DCF value into its valuation.

Source: RHB Securities Research - 5 May 2017