Review

• Pesona’s 1H18 core profit of RM6.5mn came in below expectations, accounting for 30.9% and 35.0% of ours and consensus’ full-year forecasts. The variance was mainly due to slower-than-expected construction progress, lower-than-expected contribution from student hostel concession, and wider-than-expected loss from its manufacturing division.

• YoY, 1H18 net profit plunged 45.9% to RM6.5mn, dragged mainly by lower contribution from construction division, as the revenue dropped 10.3% to RM300.6mn, coupled with deterioration of construction operating margin by 1.5% pts to 3.1%. The margin was negatively impacted by higher construction costs and depreciation charges for construction plant and equipment.

• QoQ, despite the construction revenue for the reporting quarter was 16.5% lower at RM136.8mn, the core profit improved by 20.6% mainly due to a rebound in construction operating margin by 1.9% pts to 4.1%. The better margin was a result of cost saving achieved from a completed project.

Impact

• Following the weaker-than-expected results, we refine our construction revenue forecast to reflect the slower-than-expected construction progress in FY18, reduce contribution from the concession business, and factor in higher loss from the manufacturing division. All in, earnings forecasts for FY18/FY19/FY20 were slashed by 32.8%/19.7%/21.9% respectively.

Outlook

• Pesona’s outstanding order book eased slightly to RM1.6bn as at end-June 2018, from RM1.7bn a quarter earlier. The outstanding order book is sufficient to provide earnings visibility to the group for the next 2 years.

Valuation

• Following the earnings adjustments, we tweak the target price lower from RM0.29 to RM0.28. Maintain SELL.

Source: TA Research - 24 Aug 2018