Pintaras Jaya - Affin Hwang Capital May 2017 Affin Hwang Investment Bank Bhd (14389-U) Page 1 of 22 Initiation: Rebound on the horizon We believe Pintaras Jaya as a piling and engineering

25 May 2017

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com Page 1 of 22

Initiation: Rebound on the horizon

We believe Pintaras Jaya as a piling and engineering expert has been under investors’ radar. We expect strong 3-year EPS CAGR of 46% in FY16-19E, benefiting from the current construction boom. As supply for piling services tightens, we believe Pintaras will be able to secure RM250m new contracts from RM1bn worth of tenders and utilise its idle capacity. We initiate coverage with a BUY call and RM4.62 target price, based on CY18E PER of 15x. Its net cash of RM172m or RM1.00/share should support net DPS of 20 sen (net yield of 5.2%).

Benefit from big construction wave

We expect Pintaras to benefit from the construction sector GDP growth of 8% in 2017E and estimated infrastructure projects worth RM150bn to be implemented. Despite the subdued property market, buildings-related construction awards have grown marginally by 6% from 1Q16 to 3Q16. Large-scale infrastructure and RM85bn worth of high-rise property development projects should drive strong demand for piling services. Normally, piling services make up about 5-10% of the total project value. As supply for piling services tightens, we expect Pintaras to reap better profit margins from new contracts.

Filling up order book

We gather that Pintaras is targeting to secure RM250m worth of new contracts this year. Although the outstanding order book is low at RM50m, we believe Pintaras has a good chance to win contracts with its readily available capacity, given the potential shortage of piling industry capacity.

Strong earnings rebound

We forecast its EPS to grow at 46% CAGR in FY16-19E based on it securing RM250-300m per annum worth of projects. Its manufacturing segment contributes recurring net income of RM5m per annum. Pintaras already achieved net income of RM24.5m in 1HFY17, surpassing net profit of RM17.8m in FY16 by 38%. We forecast net profit of RM35m in FY17E (+98% yoy), assuming a weaker 2HFY17 due to its depleting order book.

Initiate coverage with a BUY rating

We initiate coverage on Pintaras with a BUY call and a RM4.62 target price, based on weighted average peer target CY18E PER of 15x. We estimate net dividend yield of 5.2%. Pintaras’ current CY18E PER of 12.4x is attractive, lagging peers’ PER of 16.2x for Suncon and 16.4x for Econpile and below its one standard deviation forward PER of 20x.

Earnings & Valuation Summary FYE 30 Jun 2015 2016 2017E 2018E 2019E Revenue (RMm) 243.0 136.9 189.6 222.0 262.5 EBITDA (RMm) 84.0 32.0 54.5 69.1 82.6 Pretax profit (RMm) 68.6 23.0 45.8 58.4 72.5 Net profit (RMm) 51.9 17.8 35.3 45.0 55.9 EPS (sen) 31.9 10.9 21.5 27.5 34.1 EPS growth (%) (5.6) (65.8) 97.6 27.4 24.2 PER (x) 12.0 35.0 17.7 13.9 11.2 Core net profit 54.3 15.6 32.9 45.0 55.9 Core EPS (sen) 33.4 9.5 20.1 27.5 34.1 Core EPS growth (%) 3.9 (71.4) 110.7 36.5 24.2 Core PER (x) 11.4 40.0 19.0 13.9 11.2 Net DPS (sen) 18.0 20.0 20.0 20.0 20.0 Dividend Yield (%) 4.7 5.2 5.2 5.2 5.2 EV/EBITDA (x) 5.3 14.1 8.3 6.4 5.1 Core ROE (%) 16.6 4.6 9.9 13.2 15.6 ROA (%) 13.0 4.3 8.8 11.1 13.0 Debt to equity ratio (x) 0.0 0.0 0.0 0.0 0.0 BPS (RM) 2.1 2.0 2.0 2.1 2.3 PBR (x) 1.8 1.9 1.9 1.8 1.7

Chg in EPS (%)

- - - Affin core/Consensus (x) 0.8 0.9 NA Source: Company, Bloomberg, Affin Hwang forecasts

Initiation of Coverage

Pintaras Jaya PINT MK; PTARAS Listing Market: Main Sector: Construction

RM3.82 @ 24 May 2017 KLCI: 1,771

Buy (initiate) Upside: 21%

Price Target: RM4.62 Previous Target: na

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(RM)PINT MK FBMKLCI

Price Performance

1M 3M 12M Absolute 7.6% 8.0% 8.6% Rel to KLCI 5.8% 4.2% 0.2%

Stock Data

Issued shares (m) 164.7 Mkt cap (RMm)/(US$m) 629.2/146.6 Avg daily vol - 3mth (m) 0.1 52-wk range (RM) 3.3-3.88 Est free float 26.0% BV per share (RM) 2.06 P/BV (x) 1.86 Net cash/(debt) (RMm) 177.99 ROE (2018F) 13.2% Beta 0.60 Derivatives Nil Shariah Compliant Yes

Key Shareholders

Dr. Chiu Hong Keong 64.2% LTH 5.0% EPF 1.2% Source: Affin, Bloomberg

Loong Chee Wei, CFA

(603) 2146 7548 [email protected]

Cassandra Ooi

(603) 2146 7481 [email protected]

www.bursamids.com

mailto:[email protected]

mailto:[email protected]

http://www.bursamids.com/

25 May 2017


Focus charts Fig 1: Healthy revenue growth Fig 2: Improving EBIT margins

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Source: Company, Affin Hwang estimates Source: Company, Affin Hwang estimates

Fig 3: Strong EPS growth Fig 4: Dividend per share

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Fig 5: Sensitivity analysis Fig 6: 12-months forward PER Band since 2012

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14 4.31 12.8 18.0

15 4.62 20.9 26.1

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17 5.23 37.0 42.2

18 5.54 45.02 50.2

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` 25 May 2017


Benefit from big construction wave Piling industry to benefit from construction wave

We believe that the local piling industry stands to benefit from the high influx of construction contracts awards. Infrastructure contract awards peaked at a 11-year high of RM57.5bn in 2016 with most of the contracts awarded coming from the RM32bn Klang Valley Mass Rapid Transit Line 2 (MRT2) and RM16bn Pan Borneo Highway (PBH) Sarawak projects. In fact, infrastructure project awards recorded the highest growth of 98.5% yoy in 2016 over the past 10 years. Fig 7: Infrastructure contracts award

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Source: CIDB RM150bn infrastructure projects to kick off

Although the infrastructure projects awarded seems to have peaked in 2016, we believe this sector will be riding a bigger wave than the year before. Our economist forecasts construction sector GDP to grow by 8% yoy to RM170bn with a GDP growth of 4.7% for 2017 (2016: 4.5%).

25 May 2017


Fig 8: Construction GDP

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Construction GDP growth will be underpinned by the roll out of mega infrastructure projects. We estimate at least RM150bn worth of infrastructure projects to kick off in 2017, including the large-scale projects to be implemented such as East Coast Rail Link (ECRL) and Kuala Lumpur-Singapore High Speed Rail (HSR). The more imminent infrastructure projects to kick off with contract awards are Light Rail Transit Line 3 (LRT3) in 1H17, while the RM55bn ECRL and RM60bn KL-Singapore HSR are expected to take off in 4Q17. We believe the construction boom will sustain for at least 2 years. Fig 9: Contract awards

Project Cost (RMbn)

High Speed Rail Link (HSR) 60

East Coast Rail Line 55

Pan-Borneo Highway (Sabah section) 13

LRT Line 3 (Bandar Utama-Shah Alam-Klang) 9

Southern Double-Tracking Rail 8

Central Spine Road 3

West Coast Expressway 2

Total 150 Source: Affin Hwang, various

25 May 2017


Sustainable growth in building contract awards in 2017

The total residential and non-residential contracts (buildings contracts) awarded for the first three quarters of 2016 have recorded an average of RM18bn per quarter but dipped significantly in fourth quarter to less than half in the previous quarters with a total contract value of RM6.7bn. The weak fourth quarter was due to property developers holding back new launches. The subdued property market was mainly driven by weak consumer sentiment, low income growth, rising cost of living, and high loan rejection rate. After omitting the skewed fourth quarter, the buildings-related construction awards have actually grown marginally by 6% from 1Q16 to 3Q16.

Fig 10: Residential and non-residential contract awards

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We believe the growth momentum for buildings-related construction contract awards will sustain in 2017 and accelerate in 2018 as the property market sentiment improves, underpinned by high-rise developmental projects yet to be developed with a total GDV of RM85.5bn like Tun Razak Exchange (RM40bn), Tradewinds Square (RM20bn), UOA Jalan Ipoh project (RM6bn) and Oxley Towers (RM3.5bn). This is excluding Digital Free Trade Zone (DFTZ) 500,000 sq ft Satellite Service Hub in Bandar Malaysia with estimated GDV of US$1.13bn. Fig 11: High-rise developmetal projects

High rise developmental projects GDV (RMbn)

Digital Free Trade Zone, Bandar Malaysia* $1.13 Tun Razak Exchange (25 buildings) 40.0 Tradewinds Square 20.0 Plaza Rakyat, Jalan Pudu 8.0 UOA Jalan Ipoh mixed development project 6.0 Oxley Towers Jalan Ampang 3.5 Skywheel, Jalan Yap Kwan Seng 1.8 Sapura Tower Jalan Kia Peng 1.5 Pavilion Ceylon Hill 1.1 Aria KLCC by Hap Seng 1.0 Fairmont, Kuala Lumpur NA Imperial Lexis at Kia Peng NA Setia Sky Seputeh, high -rise residential 0.9 Trio by Setia, mixed development 0.6 KL Eco City, mixed development 0.5 Mah Sing, Titiwangsa Land 0.7 Total known GDV 85.5

Source: Various

25 May 2017


Filling up order book Good opportunity to clinch more contracts

We believe Pintaras stands to benefit from the expected implementation of infrastructure projects worth RM150bn starting in 2017. Although property development projects remain lackluster at this juncture, we believe the contract awards should pick up once the property market picks up in 4Q17E, underpinned by the RM85bn high-rise developmental projects yet to be awarded, which require extensive piling machines. Piling and foundation earthworks usually make up about 5% to 10% of the total project value and can easily command higher percentages i.e. 10% to 20% for more challenging projects or soil conditions. We expect piling companies such as Pintaras to benefit from the structural growth of the sector. We believe the rising number of large-scale infrastructure and high-rise mixed development property projects should spur demand for piling services. Given the scarcity of land and rising prices in prime locations, most developers are utilizing their prime land bank for high-rise mixed development projects to reap higher returns. They are also embarking on land reclamation projects due to land scarcity. Some difficult soil conditions and land terrains require Pintaras’ specialized piling expertise and strong track record. More difficult jobs typically derive higher profit margins for Pintaras. We gather that Pintaras could potentially secure RM250-300m worth of contracts this year as it has been more active in tendering for new projects. Current outstanding tender book is about RM1bn. However, the current outstanding orderbook is at a historical low of RM50m because most of its projects are at the tail end. But we expect Pintaras’ order book to expand this year. The current depleting orderbook remains a key concern and poses earnings risk. But, Pintaras has been able to win small-size projects with higher margins than other players in the markets. Pintaras has never made any losses historically. Despite the risks, we expect the company to achieve at least RM250m worth of new contracts this year. Normally, each piling project lasts about 15-16 months. Current ongoing projects are mostly property development related, e.g. Pinnacle Sri Petaling, I-City Central Plaza and Tower and some work for an office building at Quantum Quest, Jalan Tun Razak.

25 May 2017


Fig 12: I-City Fig 13: Pinnacle Sri Petaling

Source: Google earth Source: Google earth

Pintaras is ready to capitalize on potential industry capacity shortage

We understand that a shortage in industry piling capacity is building up due to rising demand in the current construction boom. Infrastructure projects such as the LRT3 requires more than 150 piling machines and major contract awards are expected in 2H17. In addition, RM85bn high-rise developmental contracts are yet to be awarded, requiring more piling machines. We gather that there are over 300 piling machines in the Malaysian market. Econpile, Pintaras and Sunway Construction, are among the top industry players with about 50, 30 and 27 bore piling machines respectively. Recently, Econpile has expanded its capacity by acquiring a drilling rig BG50 in anticipation of more piling projects ahead. In view of the potential shortage of piling capacity in the market, we believe the Pintaras can capitalize on the rising opportunities to win new contracts and can be selective on the projects undertaken to ensure its above-industry profit margins are preserved.

25 May 2017


Pintaras’ forte is piling services

Most of Pintaras’ ongoing projects are at the tail end, and most of its current fleet of 30 bore piling machines are ready to be deployed for any new projects. It has three key competitive advantages:

1) Pintaras has a full range of piling machines that are well suited for various soil conditions, which reduces the need for outsourcing. The in-sourcing allows Pintaras to reap better profit margin, while maintaining better control over time and quality of the works.

2) A huge portion of Pintaras’ machines are fully depreciated and most are still in the good working condition due to the adoption of best industry practices in equipment maintenance. Thus, Pintaras’ depreciation cost will be relatively low in the coming years as there are no plans to expand its fleet currently.

3) Pintaras has 28 years of experience and in-depth technical knowledge in the local piling industry. Leveraging on this, Pintaras can afford to be more discerning in choosing certain projects that will preserve its above-industry average profit margin. Pintaras’ average EBIT margin of 26% is higher than its direct listed competitor Econpile, which derives EBIT margin of 14%. Based on historical average, Pintaras’ PAT margin of 23% is more than double that of Econpile’s PAT margin of 10%. However, Pintaras margin has contracted significantly in 2016 due to cost overruns for certain projects and its depleting order book.

Fig 14: EBIT margins of Pintaras and Econpile Fig 15: Net profit margins of Pintaras and Econpile

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25 May 2017


A well-run family business

Pintaras was founded by Chairman and Managing Director Dr. Chiu Hong Keong, who holds a Bachelor of Civil Engineering degree (First Class Honours) from the University of Auckland and Doctorate of Philosophy degree in Engineering from Monash University. Dr. Chiu served as Geotechnical Engineer of Victorian Country Roads Board of Australia for a brief stint before returning to Malaysia to join Pilecon Engineering Bhd in 1982 as a Geotechnical Engineer. In 1983, he joined Ho Hup Construction Company Sdn Bhd and worked there from 1984 to 1989. From our understanding, Dr. Chiu runs the company’s core business, which is piling and engineering, while his son Mr Chiu Wei Wen, who is also the Executive Director oversees the manufacturing business segment. Pintaras has a small and profitable manufacturing business producing metal containers for industrial pails and cans for paint, chemical, lacquer, lubricant, confectionery and food industries. They acquired Prima Packaging Sdn Bhd in 1999, which has generated steady earnings, ie, average revenue of RM35m p.a. and average net profit of RM4-5m p.a. Dr. Chiu’s wife, Patricia Khoo, who is also an Executive Director manages Pintaras’ accounting, marketing, finance, administration and corporate affairs. She graduated with a Bachelor of Economics (Accounting) degree from Monash University and obtained her Master of Business Administration from Southern Cross University. She is a Fellow of CPA Australia and a member of the Malaysian Institute of Accountants as well as the Malaysian Association of Company Secretaries. In our view, the family-run company is stable with high management commitment due to the family interests. In addition, the family-run business is nimble with fast decision making as there is less bureaucracy with a relatively flat organizational structure. It also helps in controlling and managing costs.

Technical barrier to entry remains high

The local piling industry is fragmented with many players such as Pintaras, Econpile and Sunway Construction (listed players) and unlisted players like Geohan Sdn Bhd, Geopancar Sdn Bhd, BAUER Malaysia Sdn Bhd, Chuan Luck Piling Sdn Bhd and others. Conventional wisdom suggests that barrier to entry is relatively low due to the low capital expenditure for piling machines. A bore piling machine costs about RM1-5m. However, it is not easy to penetrate the piling industry due to cost competitiveness and technical barriers. A large fleet of piling machines is required to reap economies of scale for cost competitiveness. A team of qualified technical operators with in-depth technical knowledge and experience is also needed to understand various geological soil conditions. In addition, it is logistically challenging and time consuming for foreign piling companies to deploy piling machines from other countries compared to locally available capacity for domestic players such as Pintaras. Nevertheless, foreign companies such as BAUER has locally-incorporated companies with established operations in Malaysia that compete with the local players.

25 May 2017


Strong earnings rebound Pintaras has two distinctive business segments:

i) Piling and engineering; ii) Metal cans manufacturing

The piling segment has contributed over 77% of group revenue on average over the past 8 years since 2009, while the supporting manufacturing business make up the remaining group revenue. Fig 16: Segmental revenue

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Piling and engineering Manufacturing

Source: Company We forecast the group revenue to grow at a 3-year CAGR of 24.2% in FY16-19E. This should be mainly driven by piling revenue growth as we assume Pintaras will secure RM250m new contracts in FY18E from the RM1bn worth of tenders submitted. Meanwhile, we forecast the manufacturing revenue to grow 1.2% p.a. driven by the anticipated rise in average selling price (ASP) and stable sales volume of metal containers. The piling business has managed to achieve average EBIT margin of 24% over the past 8 years. Pintaras probably has one of the highest EBIT margins among piling companies due to its discerning choice of projects, compared to its peers. For instance, Econpile has only managed to achieve average EBIT margin of 14% over the past 4 years. Meanwhile, its manufacturing business generates average EBIT margin of 18%.

25 May 2017


Fig 17: Healthy revenue growth Fig 18: Improving EBIT Margins

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Manufacturing segment provides recurring income

The small but profitable manufacturing business proved to be a good diversification for Pintaras. Prima Packaging Sdn Bhd was wholly acquired back in 1999. It is a metal container manufacturer, which specializes in producing industrial pails and cans. It has been servicing the paint industry for over 40 years with long-standing clients like Nippon Paint, Colourland and Jotun Malaysia. Besides the 25-litre lugged cover and tighthead metal containers, Prima Packaging also manufactures small 100ml metal cans, cookie and biscuit cans and printed plates. It has a production capacity in excess of 8m pails and cans p.a. servicing over 200 customers. Its direct competitor is Kian Joo but Pintaras is the largest in terms of industrial pails. Fig 19: Industrial metal pails Fig 20: Cookie and biscuit cans

Source: Company Source: Company

We estimate the manufacturing business to generate recurring earnings/cash flows of RM5-6m p.a., which partially mitigates the cyclical nature of earnings/cash flows from its piling business.

25 May 2017


3-year EPS CAGR of 46% in FY16-19E

In FY16, EPS contracted 66% yoy to 10.9 sen on the back of a lower revenue of RM136.9m (-44% yoy). This was mainly due to the property market slow down and lower profit margin for legacy building projects secured by Pintaras before 2016. We strongly believe that the bad times for Pintaras ended in FY16. In 1HFY17, Pintaras achieved EPS of 15 sen, already exceeding FY16 EPS. We forecast EPS rebound of 98% yoy from a low base of 10.9 sen in FY16 to 21.5 sen in FY17E. However, the low outstanding orderbook of RM50m will likely lead to lower EPS in 2HFY17 compared to 1HFY17. Please note that Pintaras financial year end is June. We expect EPS to grow 24% yoy to 34 sen in FY19E assuming Pintaras:

i) Secures new contracts worth RM250m in FY18E and RM300m p.a. in FY19-20E;

ii) Benefits from RM150bn worth of large-scale infrastructure projects to be rolled out such as ECRL and HSR;

iii) More high-rise mixed development property projects, which should drive demand for piling services;

iv) Full utilization of its existing fleet of piling machines; and v) The increase in ASP for its metal container manufacturing business.

Fig 21: EPS and EPS growth

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25 May 2017


Effective cost management

We expect EBIT margin to improve by 3.6ppt in FY18E due to lower depreciation costs. We gather that a substantial portion of Pintaras’ piling machines have been fully depreciated. Therefore, we forecast lower depreciation charges in FY17-19E, hovering around RM15m p.a. For 1HFY17, Pintaras recorded RM7.5m in depreciation charges. Management indicated that there are no major capital expenditure plans. In the event of higher-than-expected contract awards than its target of RM250-300m in FY18E, Pintaras could easily outsource some of the works at the expense of slightly lower profit margins. Fig 22: EBIT margins and depreciation

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Historically, Pintaras has consistently paid dividend equivalent to 40% of earnings on average. Despite its PAT hitting a low of RM17.8m in FY16, Pintaras declared a higher DPS of 20 sen (FY15: 18 sen), ie, dividend payout ratio of 113%. Assuming that Pintaras maintains the absolute DPS at 20 sen in FY17E, net yield of 5.3% looks attractive. Its balance sheet remains healthy with net cash of RM171.7m or RM1.00/share in FY16, which is sufficient to support our projected DPS of 20 sen in FY17E.

25 May 2017


Fig 23: DPS and dividend payout ratio

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Source: Company, Bloomberg, Affin Hwang estimates Being a company with a net cash position generally has its advantages. It is able to sustain its operations during turbulent times and can incur capex for expansion without incurring debt. However, its capital structure is not optimized by not having debt in its balance sheet. Its idle cash generates low returns due to the family’s cautious stance in undertaking business expansion or potential acquisitions. Pintaras’ average ROE of 13.3% was lower than Econpile’s 26.1% over the past 3 years. Fig 24: ROE

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25 May 2017


Valuation and recommendation Potential laggard and dividend yield stock

Pintaras’ share price performance has lagged behind its pure piling peer Econpile. We expect sustained interest in mid-cap construction and piling stocks due to the current construction boom. Pintaras has been under investors’ radar due to its conservative stance in tendering for projects. We believe Pintaras can win new contracts in FY18 given its extensive experience and good track record, and easing competition due to capacity constraints faced by peers with record high order books. This should spark an upward re-rating of the stock. We recommend buying the stock in anticipation of sustained earnings growth in FY18E (+27% yoy) following a strong rebound in FY17E (+98% yoy) from a low base in FY16. In a long run, we expect the construction boom to sustain Pintaras’ earnings growth in FY19E (+24% yoy) as it grows its order book on the back of RM150bn worth of infrastructure projects to be rolled out and the expected recovery in the property market. Fig 25: Price performance chart

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25 May 2017


Initiate coverage with a BUY and target price of RM4.62 We initiate coverage on Pintaras with a BUY call and a target price of RM4.62 implying 21% upside potential. We value Pintaras at RM4.62 based on target PER of 15x applied to our CY18E EPS(close to weighted average peer target CY18E PER of 15.3x). Fig 26: Sensitivity of total return to target PER assumptions

CY18 PER TP Upside (%)

Total Return (%)

13 4.00 4.7 9.9

14 4.31 12.8 18.0

15 4.62 20.9 26.1

16 4.92 28.9 34.1

17 5.23 37.0 42.2

18 5.54 45.02 50.2 Source: Affin Hwang estimates Although we note that Pintaras does not have a formal dividend policy, it has been paying dividend consistently since 1994. We believe the current net yield of 5.2% is attractive and is the highest among peers. Fig 27: Peer comparison

BB Rating Sh Pr TP

Mkt Cap

Target PE (x) Year PE (x)

EPS growth (%)

EV/EBITDA (x)

P/B (x)

ROE (%)

Div. Yield (%)

Company Code (RM) (RM) (RMm) CY18E end CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY18E

Ikhmas IJGB MK N/R 0.70 N/R 364 11.0 Dec 11.9 10.1 nm 16.9 5.2 4.2 1.3 16.8 3.2

Suncon SCGB MK BUY 2.07 2.00 2,676 15.6 Dec 17.0 16.2 27.7 4.9 8.3 7.4 3.6 24.8 3.3

Econpile ECON MK N/R 2.45 N/R 1,311 16.0 Jun 17.3 16.4 2.9 5.3 8.2 7.2 2.9 26.8 2.6

Pintaras PINT MK BUY 3.82 4.62 629 15.0 Jun 15.6 12.4 51.0 25.6 6.6 5.2 1.7 14.4 5.2

Average

4,980 15.3

16.5 15.3 27.2 13.2 7.1 6.0 3.0 20.7 3.6

Source: Affin Hwang estimates, Bloomberg, prices as of 24 May 2017

Justification for our target CY18E PER of 15x

Based on consensus average target prices, target CY18E PER for Econpile, Sunway Construction and Ikhmas Jaya are 16x, 15.6x and 11x, respectively. This gives a weighted average peer target CY18E PER of 15.3x. We have conducted a sensitivity analysis based on various target CY18E PER and believe that 15x is fair for the following reasons:

i. 3-year EPS CAGR of 46% in FY16-19E. Target PER-to-growth of 0.3x is below the rule-of-thumb of 1x;

ii. Target CY18E PER of 15x is above 12-month forward mean PER of 12.3x but below the one standard deviation above mean PER level of 20x. There is potential upside as historically the stock traded at peak PER of 32x in July 2015.

25 May 2017


Fig 28: Rolling 12-month forward PER

-

5

10

15

20

25

30

35

201

2

201

3

201

4

201

5

201

6

201

7

+1SD: 20x

Avg: 12.3x

-1SD: 4.8x

(x)

Source: Company, Bloomberg, Affin Hwang estimates Shariah-compliant stock

Pintaras is a shariah compliant stock. Currently, Lembaga Tabung Haji (LTH) and Employee Provident Fund (EPF) holds a 5.0% and 1.2% stake, respectively.

25 May 2017


Key Risks Earnings risk

Although we expect Pintaras to secure RM250-300m worth of new contracts per year, there are earnings risks if it is unable to win new contracts or secures a smaller contract value. The timing of Pintaras’ contract wins is crucial because its outstanding order book is at a worrying level of RM50m. Chiselled margins

Profit margins could be eroded if competition for new contracts are stiff, given that most projects are awarded to the lowest bidder with comparable technical bid. Pintaras has always achieved higher margins historically due to its discerning choice of projects but in the view of low outstanding order book, it might be pressured to take on projects with lower margins. Defect liabilities and execution risk

We understand that there could be potential earnings drag due to defect liabilities and execution risks. Conventionally, defect liability period for a particular project is about two years. There is always a risk that Pintaras could incur additional cost on defect liability claims for completed projects. In addition, challenging projects like complex infrastructure and high-rise buildings pose high execution risks.

25 May 2017


Appendices Company Background

Pintaras Jaya is a piling and foundation expert based in Shah Alam with 25 years’ experience in Malaysia. The major piling systems offered include cast-in-place bored piles, driven piles, jacked-in piles, micropiles and hand-dug caissons. Capitalizing on its piling expertise, its engineering services extends to earth retaining systems, sub-structures and basements, ground improvement, earthworks and civil engineering works. Some of its notable projects include: Fig i: Previous notable projects

Projects Services Value (RMm)

Maple Residence, Bandar Bestari, Klang Pilling and substructure works for mixed development

28

City View - Eaton Residence Piling works 22

Icon City Extension of diaphragm wall and bored piling works

21

Lakeville Residence Piling and pile cap works for a mixed development in Taman Wahyu

71

Warisan Merdeka Foundation works 74

SPRM Putrajaya Bored piling works for office building administration

24

Datum Incity Piling and basement construction 24

MRT Bored piling works for One Utama and The Curve station

20

Villa Wangsamas Pilling and substructure works 22

Pavilion Hilltop Earthworks, piling and substructure works 34

Pavilion Substructure works 30

Marc Services Residence Piling and earthworks 8

Kiaramas Ayuria Piling and foundation works 11

Jalan Bukit Bintang Diaphragm walls and ground works for a mixed development buildings

26

Guthrie Corridor Expressway Design and build bridges 62

JB Sentral Pilling and earthworks 22

Plaza Mont’ Kiara Structural works 30

Total 528 Source: Company

25 May 2017


Fig ii: Corporate structure

Primary activities

Subsidiaries

Pintaras Geotechnics Sdn BhdGeotechnical & foundation engineering

services

System Micro-Piling Sdn BhdSpecialised geotechnical contractor

E-Wall Sdn BhdManufacturing & installation of segmental pre-cast

concrete retaining walls

Pintaras Prima Sdn BhdInvestment holding

Prima Packaging Sdn BhdManufacturing of metal containers

Pintaras Development Sdn BhdProperty investment & development

SMPP Development Sdn BhdProperty developer

Pintaras Megah Sdn BhdBuilding super-structure contractor

Readycast Concrete IndustriesSdn Bhd

Manufacturing of pre-cast concrete piles & concrete-related products

Pintaras (East Malaysia)Sdn Bhd

Foundation & civil engineering contractor

Primapac Sdn BhdProvision of management & technical

services

Pintaras Piling Sdn BhdDriven pile contractor

Solidprop Sdn BhdProperty investment

Source: Company

25 May 2017


Pintaras Jaya - FINANCIAL SUMMARY

Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Jun (RMm) 2014 2015 2016 2017E 2018E 2019E FYE 31 Jun (RMm) 2014 2015 2016 2017E 2018E 2019E

Revenue 201.9 243.0 136.9 189.6 222.0 262.5 Growth

Operating expenses (123.6) (159.0) (104.9) (135.1) (153.0) (179.8) Revenue (%) 16.8 20.4 (43.7) 38.6 17.1 18.2

EBITDA 78.3 84.0 32.0 54.5 69.1 82.6 EBITDA (%) 13.8 7.3 (61.9) 70.4 26.6 19.7

Depreciation (13.1) (17.4) (16.2) (15.3) (15.1) (14.8) Core net profit (%) 13.0 5.6 (71.3) 111.1 36.5 24.2

EBIT 65.2 66.6 15.8 39.2 54.0 67.8

Net int income/(expense) 3.1 4.3 5.0 4.2 4.4 4.7 Profitability

Associates' contribution 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA margin (%) 38.8 34.6 23.4 28.8 31.1 31.5

Forex gain/(loss) 0.1 0.7 0.2 0.0 0.0 0.0 PBT margin (%) 35.2 28.2 16.8 24.2 26.3 27.6

Exceptional gain/(loss) 2.8 (3.0) 2.0 2.3 0.0 0.0 Net profit margin (%) 26.9 21.4 13.0 18.6 20.3 21.3

Pretax profit 71.2 68.6 23.0 45.8 58.4 72.5 Effective tax rate (%) 23.8 24.3 22.8 23.0 23.0 23.0

Tax (16.9) (16.6) (5.3) (10.5) (13.4) (16.7) ROA (%) 15.2 13.0 4.3 8.8 11.1 13.0

Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 Core ROE (%) 17.8 16.6 4.6 9.9 13.2 15.6

Net profit 54.2 51.9 17.8 35.3 45.0 55.9 ROCE (%) 22.6 20.4 4.7 11.8 15.9 19.0

Dividend payout ratio (%) 27.7 34.7 112.5 56.7 44.5 35.8

Balance Sheet Statement

FYE 31 Jun (RMm) 2014 2015 2016 2017E 2018E 2019E Liquidity

Fixed assets 107.7 110.9 97.2 85.6 75.0 65.4 Current ratio (x) 4.1 5.1 4.7 5.7 5.7 5.7

Other long term assets 17.6 26.4 27.1 27.1 27.1 27.1 Op. cash f low (RMm) 63.3 70.1 24.9 38.6 47.4 55.6

Total non-current assets 125.4 137.3 124.2 112.7 102.1 92.5 Free cashflow (RMm) 29.0 40.9 22.4 34.8 43.0 50.3

FCF/share (sen) 52.3 32.6 20.7 21.2 26.2 30.7

Cash and equivalents 151.7 176.2 171.7 173.7 183.9 201.5

Stocks 15.6 18.4 18.0 16.8 19.1 22.5 Asset management

Debtors 88.6 81.1 83.0 86.9 101.7 120.2 Debtors turnover (days) 152.7 127.5 218.8 167.2 167.2 167.2

Other current assets 2.3 0.8 7.1 7.1 7.1 7.1 Stock turnover (days) 51.2 43.5 74.8 52.6 52.6 52.6

Total current assets 258.1 276.5 279.8 284.5 311.8 351.4 Creditors turnover (days) 105.6 96.8 161.5 105.0 105.0 105.0

Creditors 40.0 35.6 42.9 33.6 38.1 44.9 Capital structure

Short term borrow ings 0.0 0.0 0.0 0.0 0.0 0.0 Net gearing (%) net cash net cash net cash net cash net cash net cash

Other current liabilities 23.0 18.5 16.5 16.5 16.5 16.5

Total current liabilities 63.0 54.1 59.4 50.1 54.6 61.4

Long term borrow ings 0.0 0.0 0.0 0.0 0.0 0.0 Quarterly Profit & Loss

Other long term liabilities 13.3 13.8 13.3 13.3 13.3 13.3 FYE 31 Jun (RMm) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Total long term liabilities 13.3 13.8 13.3 13.3 13.3 13.3 Revenue 35.8 31.2 29.0 40.9 59.7 59.8

Shareholders' Funds 307.3 345.9 331.3 333.9 346.1 369.2 Operating expenses (25.2) (24.3) (22.0) (32.2) (42.5) (43.2)

EBITDA 10.6 6.9 7.0 8.7 17.2 16.5

Cash Flow Statement Depreciation (4.2) (4.2) (4.0) (3.8) (3.7) (3.8)

FYE 31 Jun (RMm) 2014 2015 2016 2017E 2018E 2019E EBIT 6.3 2.7 3.0 5.0 13.5 12.8

PAT 54.2 51.9 17.8 35.3 45.0 55.9 Net int income/(expense) 1.2 1.3 1.3 1.2 1.1 1.0

Depreciation & amortisation 13.1 17.4 16.2 15.3 15.1 14.8 Associates' contribution 0.0 0.0 0.0 0.0 0.0 0.0

Working capital changes 2.6 (5.1) 1.8 (12.0) (12.6) (15.1) Forex gain/(loss) 0.3 (0.2) (0.1) (0.0) (0.1) 0.1

Others (6.6) 5.9 (10.9) 0.0 0.0 0.0 Exceptional items 0.5 (0.4) 0.2 0.6 1.7 0.6

Cashflow from operation 63.3 70.1 24.9 38.6 47.4 55.6 Pretax profit 8.4 3.5 4.4 6.7 16.2 14.5

Capex (34.3) (29.2) (2.5) (3.8) (4.4) (5.2) Tax (1.7) (1.0) (1.0) (1.6) (3.0) (3.2)

Disposal/(purchases) 54.7 12.2 11.4 0.0 0.0 0.0 Minority interest 0.0 0.0 0.0 0.0 0.0 0.0

Others (27.8) (11.1) (10.0) 0.0 0.0 0.0 Net profit 6.7 2.5 3.4 5.1 13.2 11.3

Cash flow from investing (7.4) (28.1) (1.0) (3.8) (4.4) (5.2) Core net profit 5.9 3.1 3.3 4.6 11.6 10.6

Debt raised/(repaid) 0.0 0.0 0.0 0.0 0.0 0.0

Net interest income/(exp) 3.1 4.3 5.0 4.2 4.4 4.7 Margins (%)

Dividends paid (20.0) (24.1) (29.3) (32.8) (32.8) (32.8) EBITDA 29.5 22.1 24.2 21.3 28.8 27.6

Others (3.1) 2.9 (2.7) (4.2) (4.4) (4.7) PBT 23.5 11.2 15.1 16.5 27.1 24.3

Cash flow from financing (20.0) (16.9) (26.9) (32.8) (32.8) (32.8) Net profit 18.8 8.1 11.7 12.6 22.1 18.9

Free Cash Flow 29.0 40.9 22.4 34.8 43.0 50.3

Source: Company, Affin estimates

` 25 May 2017


Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as

a recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a di ffering view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2146 3700 F : + 603 2146 7630 [email protected] www.affinhwang.com

Documents

Pintaras Jaya - Affin Hwang Capital May 2017 Affin Hwang Investment Bank Bhd (14389-U) Page 1 of 22 Initiation: Rebound on the horizon We believe Pintaras Jaya as a piling and engineering