Summary
Pesona Metro Holdings Bhd specialises in government infrastructure projects, commercial developments, residential buildings, and industrial facilities. The company also holds concessionaire assets and is expanding into the property development business.
Moving forward, Pesona is expected to achieve strong financial growth, supported by (i) improved construction project margins from execution of outstanding order book of RM2.2bn, (ii) stable recurring income from concession segment and (iii) maiden venture into property segment through M&A activity).
Pesona is valued at RM0.46 based on a Sum of Parts valuation, which also corresponds to a 13.0x 1-year forward PER of the Group’s FY25F EPS of 3.5 sen. This valuation is a discount to Bursa Construction Index’s 1-year forward PER of 16.0x, premised to Pesona Metro’s smaller market cap.
Investment Highlights
Construction segment emerging out of woods, improved margin to be see going forward. The Group’s construction businesses faced challenges in recent years due to margin squeeze from rising costs for materials, labor, and transportation. Bulk of the low-margin projects are at tail end of the construction cycle and recent contracts with better margins to aligned with the inflationary pressure are expect to kick off over the foreseeable future. Combined with a stable input cost environment and a robust order book valued at RM2.2bn, the Group is expected to achieve significant financial growth in upcoming years.
Marking footprint into property development offers a new revenue stream and potentially pave way for asset injection. The Group has proposed acquiring a 51.0% stake in Gaya Kuasa Sdn Bhd, which is deemed a related private entity, with the deal expected to close by the end of 2024. This acquisition will bring Gaya Kuasa’s ongoing project, REN Residence, located in Bukit Jalil, KL, into the Group. REN Residence has an estimated GDV of RM 788 million and is projected to generate RM140m in pre-tax profit, assuming all units are sold. Its strategic location near established developments, such as an LRT station and an international school, bolsters sales potential. The venture into property development segment is expected to create new revenue streams and drive earnings growth. We also do not discount for a potential M&A activity with another privately owned entity by the major shareholder, Juta Asia.
Concessionaire segment provides steady and high-quality earnings. Pesona Metro holds a 22.5-year concession, extending to 2036, for the development and maintenance of student hostels at Universiti Malaysia Perlis (UniMAP) in Padang Siding. This segment consistently delivers an average annual net profit of RM9.0m to the Group. The concession provides stable and predictable cash flows and earnings, supported by a reliable counterparty, the Ministry of Higher Education, which ensures timely payments. This stable income helps mitigate earnings uncertainty risks posed by other segments. The segment’s stability is also reinforced by the Stable rating (AA) granted by the finance rating agency on their recent Sukuk issuance. Furthermore, with the current hostels nearing full occupancy, we expect increased revenue from this segment, potentially through securing additional concessions to expand student accommodation at UniMAP.
Strengthening in financial position. Moving forward, we anticipate strong financial growth for Pesona Metro, driven by a robust order book of RM2.2bn and improved project margins. Bottom line is expected to benefit from reduced depreciation costs, as most assets purchased before the pandemic has already been fully depreciated while remaining operational. Additionally, the Group will benefit from the carry-forward of unutilized tax losses from previous years, which should keep the effective tax rate at a lower level.
Undemanding valuation. We believe Pesona Metro is trading below its intrinsic value, with a 1-year forward PER of 7.2x in FY25F. This is significantly lower against the construction sector average of 16.0x 1-year forward PER. The discount is likely due to the Group being under the radar in the market.
Valuation & Recommendation
We derived a fair value of RM0.46 to Pesona Metro, based on a Sum-of-Parts (SOP) valuation. We assigned 8.0x P/E multiple applied to the construction segment’s FY25F earnings, which is lower than the construction sector's average of 16.0x 1-year forward PER, reflecting Pesona's smaller scale of business. Additionally, the concessionaire business is valued using a DCF method with a 7.4% WACC rate, while the property development segment is assessed using an RNAV approach.
Our target price of RM0.46 corresponds to a 13.0x 1-year forward PER based on the Group’s FY25F EPS of 3.5sen, which is still below the Bursa Construction Index’s 1-year forward PER of 16x. At current share price of RM0.25, we deemed valuations are fairly attractive, premised to the potential strong earnings growth prospects.
Disclaimer
The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report.
Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against Apex Securities Berhad. Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of Apex Securities Berhad.
Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.449296 | 4.484012 |
EUR | 4.692599 | 4.701308 |
CNY | 0.615732 | 0.616932 |
HKD | 0.571606 | 0.576092 |
SGD | 3.310067 | 3.336427 |