PESTECH has just secured yet another contract from NGCP worth RM112m for EPCC upgrading work for South Luzon substations in the Philippines. This is its 3rd offshore contract win which showcase its prowess in bidding internationally. Meanwhile, with the revival of mega transportation infrastructure projects back home, contract awards should start rolling soon. Given its technical capability, PESTECH is likely to stand a good winning chance. Maintain OP at RM1.75.

Secured RM112m Filipino project. Last Friday, PESTECH announced that its wholly-owned subsidiary Pestech Sdn Bhd has received a Notice of Award from National Grid Corporation of the Philippines (NGCP) for the EPCC contract for South Luzon Substations Upgrading Project Stage 1 (San Juan and Lumban Substations) and Stage 2 (Daraga Substation) for a total contract value of c.RM111.7m which consists of: (i) offshore portion of USD16.64m, and (ii) onshore portion of PHP528.8m. Under the contract, PESTECH will deliver an EPCC work for the existing obsolete 230kV and 69kV electrical equipment including the associated equipment and materials in San Juan, Lumban and Daraga Substations with project durations over 360-450 days.

Another NGCP contract secured in three weeks. We are positive with this win which is another major power infrastructure project awarded by NGCP hot on the heels of the Cebu-Bohol 230kV Interconnection project clinched by PESTECH on 12 Dec. This RM112m project forms part of the major power infrastructure upgrading undertaken by NGCP in its efforts to replace and upgrade the reliability of the power infrastructure in Philippines to support robust growth. With these two major Filipino contracts coupled with the ADB-funded contract secured in PNG the week before, PESTECH proved that it possesses the capacity and ability to provide and deliver products and services at the international level.

Contracts keep flowing. This is its 3rd contract win in three weeks and is also the 4th project win for FY20, totalling YTD contract win to RM314.4m against our targeted order-book replenishment of RM750m. We believe the contract flow will not stop here. Just two weeks ago, the Prime Minister said that the KL-Singapore HSR is to go ahead albeit at a lower cost. As such, there are at least four mega transportation infrastructure projects, namely HSR, KVDT2, LRT3 and ECRL, in the near term for PESTECH to bid for in the rail electrification packages. Meanwhile, its current order-book of RM1.7b will support earnings growth for the next two years.

Still an attractive alternative utility play; OUTPERFORM maintained. Although share price has risen 37% YTD, we believe the market has yet to appreciate the growth potential in this stock, given the earnings growth potential of 26%/14% which imply decent PER of 11x/10x for FY20/FY21. For now, we keep our estimates unchanged. We continue to like this niche utility infrastructure play which could potentially benefit from the revival of mega projects domestically and the fast growing energy infrastructure development market in Cambodia. As such, we also maintain our OUTPERFORM rating and target price of RM1.75/SoP share. Risks to our call include: (i) failure to replenish order book, and (ii) cost overruns.

Source: Kenanga Research - 30 Dec 2019