Pestech International Bhd
(Dec 22, RM3.31)
“Neutral” with a target price (TP) of RM3.54: We revise our call to “neutral” with a TP of RM3.54 pegged to a price-earnings ratio (PER) of 14 times based on Pestech’s financial year 2016 (FY16) earnings per share of 25.3 sen.

We reduce our previous valuation-pegged PER of 16 times. The Bursa Malaysia Trading & Services Index’s forward PER is nine times for companies of similar market capitalisation as Pestech (RM501.2 million) under current market conditions.

Despite that, we feel that a case for a valuation premium can be made. We still like Pestech’s medium-term outlook and look at it favourably given its high return on equity (ROE) and have accorded it a PER valuation premium over its peers’ PER of nine times.

Pestech’s third quarter (3QFY15) net profit of RM7.2 million (+16.1% year-on-year [y-o-y]) brings the cumulative net profit of FY15 to RM16.9 million (+22.9% y-o-y), representing 34.4% of our forecast for the 18-month period. The cumulative nine-month earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM28.3 million (+14.6% y-o-y) is 38.8% of our forecast.

Although both figures fell slightly short of our forecasts, earnings for the remaining nine months of FY15 will receive a boost from higher contributions from the Alex Corp and Sakura projects.

Project revenues registered an increase of RM21.6 million (+47.3%) compared with the prior year due to the billings from the Alex Corp and Sakura projects. Although product revenues slipped by RM6.7 million (84.8%) due to the drop in third-party product sales, on a quarter-on-quarter basis, this was an increase of RM1.9 million (+22.9%) — Inter-Pacific Research, Dec 19

This article first appeared in The Edge Financial Daily, on December 23, 2014.