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Monday, December 5, 2016

Brokers Report: Pesona Metro - Blending growth with stability



Recommend BUY with target price (TP) of RM0.81




Highlights

  • Backed by sizable orderbook. Pesona’s new job wins have totalled RM1.8bn YTD, the highest achieved. Its orderbook stands at a record RM2.3bn, growing 3-fold within a year. This translates to a 9.6x cover on FY15 construction revenue, the 2nd highest ratio within our sector universe.
  • Reputable clientele base. All of Pesona’s existing jobs are either government related or from listed property developers in Singapore, Malaysia and Thailand. With 75% of its orderbook comprising of newly secured jobs this year, risk of cost overruns is minimal.
  • More to come. Management is comfortable to achieve RM500m in new job wins for FY17. Potential jobs include hospitals (RM220m) and river beautification (RM200m). Given Pesona’s strong track record in building jobs, we view it as a beneficiary of Greater KL’s catalytic developments.
  • Incoming concession. Pesona will soon conclude the acquisition of SEP, the eventual concessionaire of the completed UNIMAP hostel. As concessionaire, SEP will earn from rental and maintenance totalling RM33m p.a. with potential profit of c.RM12m for FY17-18. Putting things into perspective, this is equivalent to Pesona’s profits last year.
  • SKIP to the next catalyst. Mosaic Theory suggests that Pesona is the 30% concession partner for the SKIP Highway with the balance 70% held by Putrajaya Perdana. At a cost of RM2.1bn, Pesona’s stake would provide RM630m worth of work to undertake, boosting its orderbook by 29%. Upon completing the highway, this would provide another avenue of recurring income to Pesona via tolling.

Risks

  • Delays in the acquisition of SEP which is targeted for 1Q17.

Forecasts

  • We project FY16-18 earnings growth of 60%, 67% and 55%, driven by the execution of its record orderbook and new recurring income stream from SEP. All in all, this implies robust 3-year earnings CAGR of 61%. Rating Initiate with BUY, RM0.81 TP (+48% upside)
  • Pesona offers investors exposure to a pure construction play with an incoming stream of recurring earnings. Its financials are solid with strong earnings growth, increasing ROE and net cash positon. The stock is an under-researched and uncrowded trade with low institutional investor shareholding.

Valuation

  • Our SOP based TP of RM0.81 implies FY17-18 P/E of 16.9x and 10.9x which we reckon is fair for a pure construction play in an earnings upcycle with concession exposure.
  • The issuance of 39.5m shares at RM0.70/share (to acquire SEP) should set a new minimum benchmark valuation for the stock (28% upside to this level).
  • Given its strong earnings growth, there is potential to double dividends next year. We have assumed 2 sen which offers a decent yield of 3.7%.



Source: Hong Leong Investment Bank Research - 05 December 2016

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