Review

• PESONA’s 1Q19 net profit of RM3.2mn came in below expectation, accounting for 12.2% of our full-year forecast. The variance was mainly due to slower-than-expected construction revenue and higher-than-expected finance costs.

• YoY, 1Q19 net profit was 8.2% higher at RM3.2mn despite the quarterly revenue was sharply lower by 27.6% at RM123.5mn. The margin improvement came mainly from a rebound in construction operating margin by 1.6%-pts to 3.8%, lower finance costs (-5.6%), and cost saving from completed projects. The decline in revenue was largely due to lower construction progress recognised from ongoing projects, especially the Central i-City mall project which was at near completion stage.

• QoQ, core earnings surged 47.9% to RM3.2mn mainly due to improvement in construction operating margin (+1.1%-pts to 3.8%), higher operating income from concession business (+5.9%) and lower finance costs (-25.0%).

Impact

• Following the weaker-than-expected results, we slash our FY19/FY20/FY21 earnings forecasts by 27.4%/20.0%/18.7% respectively, after adjusting our construction revenue recognition for FY19 to FY21, raising finance costs and revising profit attributable to minority interest.

• With lower projected earnings, we trim FY19 and FY20 yearly dividend assumptions from 1.5sen/share to 1.0sen/share.

Outlook

• PESONA’s outstanding order book stood at RM2.0bn. This is sufficient to provide earnings visibility to the group for the next 2 to 3 years.

Valuation

• We lower the target price to RM0.26, from RM0.27 previously, after revising our earnings forecasts and rolling forward our valuation based year to CY20. Maintain Buy.

Source: TA Research - 23 May 2019