Review

• Pesona’s 1Q18 core profit of RM3.0mn came in below expectations, accounting for 10.3% and 10.8% of ours and consensus’ full-year forecasts. The variance was mainly due to weaker-than-expected contribution from the construction division, in terms of top line and margin.

• 1Q18 revenue increased by 6.3% to RM170.6mn as construction progress accelerated. However, net profit was 50.8% lower due to higher material costs and labour costs. Construction operating margin declined sharply by 4.3% pts to 2.2%.

• QoQ, 1Q17 revenue surged 89.3% to RM170.6mn due to higher construction progress, especially from the construction of i-City Mall. Despite the sharp increase in the top line, net profit dropped 22.4% for the similar reason above.

Impact

• Following the weaker-than-expected results, we revise downwards revenue recognition and margin assumptions for various construction projects. We also trim our FY18/FY19/FY20 order book replenishment assumptions from RM800mn/RM500mn/RM500mn to RM600mn/RM400mn/RM400mn respectively. All in, earnings forecasts for FY18/FY19/FY20 were cut by 26.2%/10.4%/29.7% to RM21.1mn/RM27.0mn/RM24.3mn respectively.

Outlook

• Pesona’s outstanding order book stood at RM1.7bn as of end-March 2018, which is sufficient to last the group for the next 2 years.

Valuation

• In line with the derating of the construction sector, we cut the construction target PE multiple from 10x to 8x. Following the earnings revision and rolling forward our valuation base year to CY19, we cut the target price from RM0.37 to RM0.29. We downgrade the stock from BUY to HOLD as the total potential return has reduced to 8.9% (including estimated dividend yield of 5.4%).

Source: TA Research - 28 May 2018