Pestech 'outperform', Glove sector 'neutral'

Pestech International Bhd

By Kenanga Research


Target price: RM2

PESTECH has secured a US$26mil (RM106mil) contract to build new electric transmission line from Oddor Meanchey to Siem Reap.

The contract is for the design, engineering, manufacturing, installation, testing and commissioning of a 115kV double circuit transmission line for approximately 75km as well as two substations. The project is expected to start next month and will be over a period of 18 to 24 months.

With this contract, Kenanga Research said Pestech has already secured three contracts in 2018 worth a total of RM236mil, including one with Tenaga Nasional Bhd and another in the Philippines.

“As of September 2017, its order book was RM1.41bil. Thus its order book is likely to rise to RM1.5bil with earnings visibility up to end-2019. While it has minimal impact in 2018 earnings, we keep our 2019 estimates as it is still within our revenue assumptions,” said Kenanga Research.

The research house said the contract raises 2019 revenue to RM600mil, based on billing progress, against its assumption of RM700mil.

“This also means that it needs a further RM100mil worth of contracts to meet our expectations for 2019,” it added.

Kenanga Research said Cambodia remains Pestech’s prospective growth area, given the high expansion of power infrastructure development there.

“Given it is a preferred engineering, procurement and construction (EPC) contractor under the private funded projects on the back of its track record, Pestech should stand a good chance to secure future projects.

“Meanwhile, the EPC portion for Diamond Power project has completed and energised in October, and Pestech is expecting its maiden recurring income stream to flow in from January 2018 onwards over the next 25 years.”

Kenanga Research said it continues to like the company for its earnings growth story.

“In fact, its valuation is no longer excessive following the lacklustre share price performance in the past 1.5 years while earnings momentum remains strong.”


By AmInvestment Bank Research

Neutral (maintained)

AMINVESTMENT Research is neutral on the glove sector in 2018 as it believes the market has fully priced in the sector’s strong fundamentals at its current historical high valuations.

The research house said it would upgrade its stance on the sector to overweight in the event of any pandemic disease outbreak which leads to an upsurge in glove demand, or if there are supply constraints for substitutes of latex and nitrile gloves, resulting in a switch to latex and nitrile gloves.

On the other hand, it will downgrade the sector to underweight in the event of a supply glut, which triggers a price war that crimps margins, or if glove makers are unable to pass on rising costs.

The research house’s top pick for the sector is Kossan Rubber Industries Bhd.

It likes Kossan for its strength in research and development which translates to product innovation; its investments in automation which boost efficiency and cut reliance on foreign labour.

It also likes the company for its earnings buffer from a non-glove business, which is its technical rubber products.

“The sector’s prospects are bright, underpinned by the expanding healthcare sector globally, both public and private, as well as the rising hygiene standards across the industries that drive the demand for gloves over the long term,” it said.

It noted that the Malaysian Rubber Glove Manufacturers Association projects that global demand for gloves will grow by 8% to 10% per year in the coming years.

“Over the immediate term, Malaysian glove makers will also continue to benefit from the glove supply shortage in China, following the massive shutdown of vinyl glove factories in China recently due to environmental issues,” it said.

However, the research house said it was mindful of a potential supply glut at some point, with most players having embarked on aggressive capacity expansion in recent years.

“This could end in severe price undercutting that would hurt margins,” it said.

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