This article first appeared in The Edge Financial Daily, on May 10, 2016.

Pintaras Jaya Bhd 
(May 9, RM3.70)
Trading buy with a fair value (FV) of RM4.20: We met up with Pintaras Jaya Bhd’s management recently, who acknowledged that 2015 had been a very slow year. However, management is expecting financial year 2017 to 2018 estimate (FY17E to FY18E) earnings to stage a strong recovery.

Since last December, Pintaras Jaya is back in the limelight bagging four jobs amounting to RM189.4 million in less than two months, bringing its outstanding order book to a healthy RM250 million, providing one year of earnings visibility. 

That said, management remains hungry for more jobs and it plans to incur RM30 million (historically, RM15 million to RM20 million) for capital expenditure in FY17 in order to cater for the influx of infrastructure jobs that are to be dished out from the second half of 2016 onwards.

Currently, Pintaras Jaya’s capacity is limited to an order book size of RM250 million. With its newly added capacity in FY17, we reckon that it would be able to churn up to RM350 million worth of jobs in FY18. 

Hence, we are assuming an order book replenishment of RM250 million to RM350 million for FY17E to FY18E, and we believe our target is highly achievable given that Pintaras Jaya’s competitors are able to secure up to RM420 million worth of jobs per annum, with a massive amount of infrastructure and building jobs in the pipeline. 

We expect a shortage of piling contractors to cater for the surge in demand, which will further benefit Pintaras Jaya. To recap, the company was once appointed a rescue-piling contractor for the Klang Valley Mass Rapid Transit Line 1 previously as certain contractors failed to deliver their work packages on time.

In the past, Pintaras Jaya maintained a decent net margin of less than 20%, which is far superior, compared with its listed peers’ (Ikhmas Jaya Group Bhd and Econpile Holdings Bhd) average net margin of 10%. 

This is largely due to management’s conservative approach in tendering for jobs. While this might cause Pintaras Jaya to lose out to its competitors, it is able to generate better returns. 

As of the second quarter of 2016, Pintaras Jaya has a net cash position of RM184.2 million with a net cash to total asset ratio of 46% vis-à-vis Econpile’s 3%. That said, management indicated that it will strive to maintain its existing dividend payout ratio at 56% or higher, which is still fairly decent compared to Econpile’s payout ratio of 30%, albeit not having a formal dividend policy. 

Furthermore, at current levels, its FY17 to FY18E dividend yields are much more compelling at 3% to 5.3% versus its peers’ average of 2% to 2.1%.

We like Pintaras Jaya for several reasons, including its prudent management, strong recovery in earnings from FY17 onwards, underpinned by its decent outstanding order book of RM250 million, strong infrastructure job flows ahead and decent growth. 

Hence, we are calling a “trading buy” with an FV of RM4.20 based on sum-of-parts, which implies a higher price-earnings ratio of 12.5 times compared to its peers’ average of 9.3 times. — Kenanga Research, May 9