Pesona expected to undertake PPA1M project

Pesona Metro Holdings Bhd (April 12, 69.5 sen)

Maintain buy with a target price (TP) of 81 sen: We recently met up with management of Pesona Metro Holdings Bhd which was represented by its chief financial officer Chong Kien Eng to gather some updates post-financial year 2016 (FY16) results. To recap, Pesona registered a strong set of earnings for FY2016 at RM20 million, growing +71% year-on-year.

Pesona’s order book stands at RM2.1 billion, translating into a strong cover ratio of 5.4 times on FY2016 construction revenue. Management guides that execution of all of its jobs is on track. Work has commenced for all of the contracts secured in the second half of 2016, namely Central Plaza Mall (RM488 million), Eaton Residence (RM402 million) and West Coast Expressway from Kapar to Asam Jawa (RM371 million).

Following a quiet first quarter of 2017 (1Q2017) for job wins, management expects this to pick up soon enough and is confident of achieving RM500 million for the year. In the near term, Pesona is in the running for a hospital job (RM100 million). It is also finalising a tender for a building job (RM300 million to RM400 million) and some roadworks.

Pesona is expected to undertake an affordable housing project via the 1Malaysia Civil Servants Housing Project (PPA1M). The project site is located in Cheras (to be provided by the government) with a gross development value of RM280 million to RM300 million.

Under the scheme, 55% of the units will be allocated to civil servants (RM150 per sq ft [psf]), while the balance 45% will be open for public sale (capped at RM500 psf). Judging from previous PPA1M developments within the Klang Valley, the portion for civil servants is usually fully taken up.

The acquisition of SEP Resources (M) Sdn Bhd (eventual concessionaire of Universiti Malaysia Perlis’ hostel) has been delayed slightly from 1Q2017 to mid-2017 due to delays in obtaining the certificate of acceptance. Management expects this to be resolved soon as all the necessary defect works have been fixed, and students have been occupying the hostel since 4Q2016.

Risks include delays in the acquisition of SEP.

Our forecasts remain unchanged. However, we reckon there could be a potential upside as we have yet to factor the PPA1M project into our earnings forecasts.

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 return on equity and a net cash position.

Our sum-of-parts-based TP of 81 sen implies FY17 to FY18 price-earnings ratios of 16.9 times and 10.9 times respectively, which we reckon is fair for a pure construction play in an earnings upcycle with concession exposure.

The impending issuance of 39.5 million shares at 70 sen per share (to acquire SEP) should set a new minimum benchmark valuation for the stock. — HLIB Research, April 12

This article first appeared in The Edge Financial Daily, on April 13, 2017.

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