Following its first and second series of issuances under Tranche 1 amounting to RM37.10 million (October 2020) and RM11.45 million (November 2020) respectively, the company is now looking at raising its third series of issuance from the Perputual Sukuk Musharakah programme amounting to RM51.45 million. The new issuance is callable on October 16, 2023 – coterminous with all series under Tranche 1 – with an initial price guidance (IPG) of 6.0%.
Note: Final issuing price is yet to be finalised. Based on the market expectation, we foresee an upside potential to investors as we believe the issuance would be priced at a discount (i.e., bond price below par).
About the Issuer
PESTECH offers industrial electric power contracting services. The company provides contracting services for engineering, procurement, manufacturing, construction, and commissioning aspects of project planning.
Among the latest wins by PESTECH is on securing Malaysia Airports Holdings Berhad's automated people mover (APM) aerotrain project and associated works in Kuala Lumpur International Airport for RM743 million in December 2021. Development of the project will take three years, starting from March 14, 2022.
About the perps
• Utilisation of proceeds – All proceeds from the Perpetual Sukuk Musharakah shall be utilised by PESTECH group for the shariah-compliant purposes as illustrated below:
Exhibit 1: Utilisation of Proceeds
Source: Pestech
• Established Reserve Account built-up as collateral – The Perpetual Sukuk Musharakah is secured via an assignment of Reserve Account (RA). The RA would act as a collateral for sukukholders of which the source of cash is expected to be built up from expected inflow from three projects (as below) worth a total of RM710 million in contract value:
• Anticipated payments via project finance – The expected cash flow of approximately RM209 million to be received from the aforementioned projects shall be built-up to an amount equivalent to the nominal amount of the first Tranche Perpetual Sukuk Musharakah and the remaining unpaid Expected Periodic Distribution Amount up to First Call Date on October 16, 2023. Under the terms, the project cash flows are to be transferred into the Reserve Account which is assigned to the Sukukholders’, supported by:
i. an irrevocable and unconditional undertaking from the relevant subsidiaries to transfer and deposit a pre-agreed percentage of proceeds from pre-identified contracts of the aforementioned projects above into the RA. As of December 31, 2021, the accumulated funds in the RA stood at RM16.6 milion in line with amount of cash build-up by June 30, 2022 of RM25.0 million.
ii. if cash build up is not met, coupon rate immediately steps up to 15% p.a. – subject to the terms and conditions of the Perpetual Sukuk Musharakah Programme.
iii. dividend Stopper applies if periodic distribution payments are deferred.
Financial Highlights
Exhibit 2: Financial performance (in RM million unless indicated otherwise)
Source: PESTECH
• Resilient revenue stream amid the pandemic – PESTECH has been able to maintain a stable revenue stream despite the challenges posed from COVID-19 pandemic in 2020. Taking FY2019 (i.e., pre-pandemic level) as a benchmark, revenue dipped only 2% y-o-y to RM797.7 million in FY2020 and rebounded about 10% (from FY2019) to RM889.4 million in FY2021 which indicates a resilient demand for services amid the economic environment. This reflects a modest operating profit margin of about 14%, which is at par with its peers in the industry.
Notwithstanding the concurrent outbreaks and of Omicron variant in Malaysia, we believe that the negative impact on PESTECH’s cash generation would be minimal. According to an announcement by the Health Minister of Malaysia on 10th January 2022 which has confirmed that there shall be no total ‘lockdown’ to be imposed despite the increasing number of infections, the company should be able to demonstrate a positive growth in its topline, thus strengthening the financial metrices in the short-to-medium term.
Exhibit 3: Cash flow protection (in RM million unless indicated otherwise)
Source: PESTECH
• Tight liquidity due to large short-term commitments – For the financial year ending June 30, 2021 (FY2021), PESTECH’s borrowings stood at RM1.25 billion (FY2020: RM1.85 billion), largely comprise of term-loans of RM856.0 million from various financial institutions. We also note that a majority of aforementioned term-loans are denominated in USD. According to the management, this term-loans are ring-fenced and will utilise a swap rate in determining any compensation re uncertainty in forex fluctuations.
• Optimistic outlook on future liquidity support – As of end-Dec 2021, PESTECH has RM2.09 billion orders in hand which translated a book-to-bill ratio of 2.4x. Given the strong demand on board, we view that PESTECH's ability in securing bridge financing to meet its short-term obligation will not be jeopardised, thus, supporting its credit metrices in the short-to-medium term.
Conclusion
Based on a 6% yield-to-maturity with a short callable date Oct 2023, along with its project cash flow backing the commitments from reserve accounts and sinking fund build-up, we are in the opinion sukuk offers reasonable value. Notwithstanding the above, our opinion is confined by the expectation that PESTECH would continue to secure its bridge financing as customary. Any changes in its credit line will require a reassessment on PESTECH's investment profile.
