3Q19 rebounded strongly by 83% sequentially on better job progress claims after a lacklustre 1H19 owing to seasonality. We expect another strong set of 4Q19 results as the Cambodia projects are in full-swing before the arrival of raining season in 1H20. We continue to rate the stock OUTPERFORM with unchanged SoP-driven target price of RM1.40 to capitalise on its earnings growth story.

9M19 within expectation. 3Q19 results matched expectations with Core Profit rebounding 83% sequentially to RM21.2m, totalling YTD 9M19 core profit to RM38.9m that made up 49% of our FY19 estimate. We expect a strong ending in 4Q19 given higher job progress especially for the Cambodian projects after the seasonally low progress in 1H19 owing to raining season there. No dividend was declared in 3Q19 as expected.

Strong sequential results as Cambodian projects back on track. After a seasonally low earnings spell in 1H19, 3Q19 core profit rebounded strongly by 83% QoQ to RM21.2m as mentioned above now that the two Alex Corp’s projects as well as Oddor Meanchey project in Cambodia have resumed work progress in the dry season. Besides, the local rail electrification projects namely, KVDT and MRT2 have also progressed well, as compared to that of in 1H19, albeit still in the initial stage of work. On the other hand, PAT margin has improved further to 10.1% in 3Q19 from 9.7% and 9.5% in 2Q19 and 1Q19, respectively, which show that sequentially, these three quarters’ margins were healthy between the benchmark ranges of 9-11%.

A better YoY results too. Despite earnings declining 15%, 3Q19 core profit leapt 41% from RM15.0m which was due to the two Alex Corp’s projects which back then was still in the initial stage that usually means lower profit margin. YTD, 9M19 core profit fell 38% to RM38.9m from RM62.8m in 9M18 as revenue contracted 27% over the year. The main reason for the earnings decline was largely due to the extreme low job claims for both local and Cambodia projects in 1H19 in contrast to 1H18 although both were during raining season.

Expect a strong ending in 4Q19. With all main projects back on track while the Cambodian projects are in full-swing for the remainder of 2H19 before the raining season starts again in 1H20, the upcoming 4Q19 results are set to be a solid, on track to meeting our estimates. Meanwhile, with the revival of ECRL and LRT3 back home, we expect more contract news flow for PESTECH in the near future. With its current order book of RM1.8b, this should keep them busy for at least the next two years.

Still attractive; OUTPERFORM reiterated. Share price of PESTECH came under heavy sell-down in the past one year, largely due to its lacklustre results in the past 3-4 quarters. With the rebound in earnings as well as its sizeable order-book and earnings back on track, it presents a good buying opportunity into this niche utility infrastructure plays for its earnings growth story. We maintain our OUTPERFORM call at unchanged SoP-driven target price of RM1.40, which implies prospective PER of 13.4x based on FY19 earnings.

Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 24 May 2019