Building blocks for Prinsiptek’s earnings recovery put in place1

Prinsiptek Corp Bhd
(Jan 10, 27.5 sen)
Fair value of 58 sen: Having laid low over the last two to three years against a backdrop of a slowdown in the local construction and property sectors, Prinsiptek’s earnings are back on the growth path again, underpinned by (1) an expected improved job flow in the construction sector; and (2) its five new property launches.

At present, Prinsiptek’s outstanding construction orderbook stands at RM171.5 million that will sustain its construction profits at least over the next two years. Over the next 24 months, Prinsiptek is hopeful about securing RM150 million to RM200 million worth of new contracts comprising largely building and infrastructure jobs.

The second earnings recovery catalyst for Prinsiptek will come from its five new property launches, four in Malaysia and one in Bangkok, Thailand, with a total gross development value (GDV) of RM489 million.

One common feature of Prinsiptek’s four new property launches in Malaysia is that they are all in established and mature areas, that is along Jalan Pahang in the heart of Kuala Lumpur, Shah Alam, Bangi and Gombak.

The execution risk of its mixed development project in Thailand is low given Prinsiptek’s familiarity with the market arising from its previous construction job in the same locality.

Risks to its view include: (1) new contracts secured in FY11 to FY12 to come in below our target of RM80 million per annum; (2) rising input costs; and (3) delays in new property launches.

We believe the construction sector prospects will be bright in 2011, underpinned by rising demand for contracting services on the back of a better job flow and tightening supply for contracting services.

We have arrived at an indicative fair value of 58 sen for Prinsiptek, valuing: (1) its construction business at 10 times one-year forward earnings, in line with our one-year forward benchmark target price earnings ratio of 10 to 16 times for the construction sector; and (2) its property business by discounting back project cash flows at the 10% property benchmark discount rate. — RHB Research, Jan 10