PESTECH’s FY22 results disappointed. It slipped into the red in 4QFY22 due to project cost overrun and delays, and most of its projects being in initial stages with insignificant profit recognition. We cut our FY23F net profit by 36% to reflect lower billings and margins, and lower our TP by 47% to RM0.35 (from RM0.66). Downgrade to MARKET PERFORM from OUTPERFORM.

Missed expectations. FY22 core net profit of RM7.2m made up only a fraction of our full-year forecast as it slipped into the red in 4QFY22.

FY22 turnover contracted 31% YoY, weighed down largely by a sharp deterioration in 4QFY22 turnover (-31% QoQ) due to the delays in the shipment of equipment from China to Malaysia on the back of the intermittent lockdowns in China.

FY22 core net profit plunged 90% YoY, dragged down by a core net loss of RM20.9m in 4QFY22 (vs. a RM4.2m core net profit in the preceding quarter) due to project cost overrun on a sharp rise in the input cost, and as most of its on-going projects were in early stages of execution with insignificant profit recognition (including the aerotrain project in KLIA that had only clocked up a 2.7% completion since the project started in 4QFY22).

Forecasts. We cut our FY23F net profit by 36%, having lowered our revenue assumption by 13% to RM650m (from RM750m) and reduced our project operating margin by two full percentage points to 3.5% (from 5.5%). We introduce our FY24F forecasts based on a revenue assumption of RM800m and a project operating margin of 5%, assuming a recovery will be in the horizon by then.

We lower our TP by 47% to RM0.35 based on 10x FY23F PER (vs. RM0.66 based on 12x previously). The widened discount vs. the average forward PER of 17x of international peers (Siemen and ABB) is to reflect PESTECH’s significantly reduced market capitalisation after the sharp correction in its share price lately. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) a depleting order book, (ii) prolonged supply-chain disruptions, and (ii) escalating input cost.

Source: Kenanga Research - 1 Sept 2022