We are initiating coverage on Pesona Metro Holdings Berhad with a BUY recommendation. Pesona Metro is principally a construction service provider. It is supplemented by manufacturing of construction panels and polyurethane products, which are relatively small compared to its core construction business. We see Pesona Metro as an emerging contractor given its good track records and relatively small base versus other more established listed contractors. Based on a target PE multiple of 14x, we value Pesona Metro at RM0.78.

Investment Case:

• Good track records and execution capability;

• Healthy balance sheet;

• Expecting strong growth for FY17; and

• Building up recurring income portfolio.

Key Risks:

• Project execution risk;

• Escalation of prices of construction resources;

• Shortage of construction resources; and

• Delay in the acquisition of SEP Resources (M) Sdn Bhd.

Forecast:

We forecast net profit for FY17 and FY18 to jump 64.9% and 15.3% to RM33.0mn and RM38.1mn respectively, supported by the surge in job wins worth RM1.8bn in FY16. Subsequently, FY19 earnings are expected to contract by 10.9% to RM33.9mn as we assumed only RM500mn of job wins for FY17, FY18 and FY19 respectively.

Valuation

We initiate coverage on Pesona Metro with a BUY call and a target price of RM0.78/share, based on 14x CY18 EPS. This offers a potential total return of 20.1% (inclusive of 3.7% estimated dividend yield).

Source: TA Research - 25 Apr 2017