Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on December 24, 2019

Pestech International Bhd
(Dec 23, RM1.33)
Maintain outperform with an unchanged target price of RM1.75:
Last Friday, Pestech International Bhd announced its wholly-owned subsidiary Pestech Sdn Bhd, through PestechYongfu JV (joint venture), had received a letter of acceptance for Award from PNG Power Ltd (PPL) for the engineering, procurement and construction contract for PPL’s Port Moresby System Study and 11kV Distribution Upgrade for a contract price in the aggregate of US$17.03 million (RM70.5 million).

This project — with the commencement date to be determined later — is funded by the Asian Development Bank (ADB) jointly with Papua New Guinea (PNG) through an international competitive bidding in accordance with ADB’s bidding procedures. We are positive about this win as it was secured through an international competitive bidding showing Pestech’s technical credentials matched international standards.

Moreover, a payment default is low since the project is funded jointly with the ADB. This is the third project awarded by PPL since 2008, including an engineering, procurement, construction and commissioning (EPCC) worth about US$12.7 million for the KilaKila substation and transmission line project in 2016.

It established a subsidiary, Pestech (PNG) Ltd, in 2016 to address local requirements for projects in Port Moresby, the largest urban centre in PNG where its energy sales growth is expected to accelerate over 10 to 15 years.

This is its second contract win in two weeks after an EPCC project worth some RM94 million in the Philippines, and is the third project win for the financial year ending June 30, 2020 (FY20), totalling year-to-date contract wins to RM202.7 million against our targeted order book replenishment of RM750 million.

We believe the contract flow will not stop here. Just last week, Prime Minister Tun Dr Mahathir Mohamad said the Kuala Lumpur-Singapore High-Speed Rail (HSR) project was to go ahead albeit at a lower cost. As such, Pestech has at least four mega transportation infrastructure projects — the HSR, Klang Valley Double Track, Light Rail Transit 3 and East Coast Rail Link — in the near term to bid for rail electrification packages. Meanwhile, its current order book of RM1.6 billion will support earnings growth for the next two years.

We still like this niche utility infrastructure play which could benefit from local megaprojects’ revival and Cambodia’s fast-growing energy infrastructure development market. Given its earnings growth potential of 26% and 14% at decent price-earnings ratios of 11 times and 10 times for FY20 and FY21 respectively, we believe the market has yet to appreciate the stock’s growth potential. Risks to our call include a failure to replenish its order book and cost overruns. — Kenanga Research, Dec 23

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