Investment Highlights

·      Construction segment emerging out of woods, improved margin to be see going forward. The Group’s construction businesses faced challenges in recent years due to margin squeeze from rising costs for materials, labor, and transportation. Bulk of the low-margin projects are at tail end of the construction cycle and recent contracts with better margins to aligned with the inflationary pressure are expect to kick off over the foreseeable future. Combined with a stable input cost environment and a robust order book valued at RM2.2bn, the Group is expected to achieve significant financial growth in upcoming years.

·      Marking footprint into property development offers a new revenue stream and potentially pave way for asset injection. The Group has proposed acquiring a 51.0% stake in Gaya Kuasa Sdn Bhd, which is deemed a related private entity, with the deal expected to close by the end of 2024. This acquisition will bring Gaya Kuasa’s ongoing project, REN Residence, located in Bukit Jalil, KL, into the Group. REN Residence has an estimated GDV of RM 788 million and is projected to generate RM140m in pre-tax profit, assuming all units are sold. Its strategic location near established developments, such as an LRT station and an international school, bolsters sales potential. The venture into property development segment is expected to create new revenue streams and drive earnings growth. We also do not discount for a potential M&A activity with another privately owned entity by the major shareholder, Juta Asia.

·      Concessionaire segment provides steady and high-quality earnings. Pesona Metro holds a 22.5-year concession, extending to 2036, for the development and maintenance of student hostels at Universiti Malaysia Perlis (UniMAP) in Padang Siding. This segment consistently delivers an average annual net profit of RM9.0m to the Group. The concession provides stable and predictable cash flows and earnings, supported by a reliable counterparty, the Ministry of Higher Education, which ensures timely payments. This stable income helps mitigate earnings uncertainty risks posed by other segments. The segment’s stability is also reinforced by the Stable rating (AA) granted by the finance rating agency on their recent Sukuk issuance. Furthermore, with the current hostels nearing full occupancy, we expect increased revenue from this segment, potentially through securing additional concessions to expand student accommodation at UniMAP.

·      Strengthening in financial position. Moving forward, we anticipate strong financial growth for Pesona Metro, driven by a robust order book of RM2.2bn and improved project margins. Bottom line is expected to benefit from reduced depreciation costs, as most assets purchased before the pandemic has already been fully depreciated while remaining operational. Additionally, the Group will benefit from the carry-forward of unutilized tax losses from previous years, which should keep the effective tax rate at a lower level.

·      Undemanding valuation. We believe Pesona Metro is trading below its intrinsic value, with a 1-year forward PER of 7.2x in FY25F. This is significantly lower against the construction sector average of 16.0x 1-year forward PER. The discount is likely due to the Group being under the radar in the market.

Financial Highlights

·      Over the four-year period from FY20 to FY23, Pesona Metro experienced notable earnings fluctuations, reflecting the volatility of the construction industry and broader economic challenges. The Group was impacted by the Covid-19 pandemic, cost overruns, and insufficient project replenishment, leading to declines in revenue and profitability pressures from FY20, leading to a net loss of -RM17.0m.

·      The challenging cost environment, marked by rising and volatile material costs, continued to impact profitability through FY22. Despite these difficulties, Pesona demonstrated resilience and adaptability, reducing losses to -RM5.4m in FY21 and achieving a robust recovery in FY23 (net profit at RM9.5m). The turnaround was fueled by strategic project completions, new project acquisitions, and effective cost management.

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·      Looking forward, we anticipate a sturdy financial growth driven recognition of a robust order book standing at RM2.2bn. However, revenue for FY24F is expected to decline by -11.3% yoy to RM457.3m due to a delay in project replenishment, with new jobs/orders were only secured in mid-2024. However, we forecast a significant improvement in bottom-line performance, projecting a +76.7% yoy increase to RM16.8m in core net profit for FY24F. The projected growth will be supported by better project margins from newly secured higher-margin jobs, aligned with inflationary input cost pressures, lower depreciation cost, and the utilisation of carried-forward losses in prior years to reduce effective tax rate.

·      For FY25F, we project a 20.0% yoy increase in revenue to RM548.8m, supported by forecasted replenishment of RM400.0m in new construction jobs. Additionally, we anticipate higher revenue from the concessionaire segment, particularly with the addition of new student hostel concessions at UniMAP, as existing hostels approach full occupancy. The acquisition of a 51.0% stake in Gaya Kuasa is set to be completed by the end of 2024, will contribute to Pesona’s financial performance in FY25F. We forecast a 43.2% yoy growth in core net profit to RM24.1m for FY25F, driven by increased concessionaire earnings and contributions from the new property development business.

Valuation & Recommendation

·      We derived a fair value of RM0.46 to Pesona Metro, based on a Sum-of-Parts (SOP) valuation. We assigned 8.0x P/E multiple applied to the construction segment’s FY25F earnings, which is lower than the construction sector's average of 16.0x 1-year forward PER, reflecting Pesona's smaller scale of business. Additionally, the concessionaire business is valued using a DCF method with a 7.4% WACC rate, while the property development segment is assessed using an RNAV approach.

·      Our target price of RM0.46 corresponds to a 13.0x 1-year forward PER based on the Group’s FY25F EPS of 3.5sen, which is still below the Bursa Construction Index’s 1-year forward PER of 16x. At current share price of RM0.25, we deemed valuations are fairly attractive, premised to the potential strong earnings growth prospects.