Summary

• Jaks Resources Bhd’s (JAKS) 2QFY22 core net profit fell 47.0% YoY to RM15.3m, in absence of construction revenue from Vietnam that was already at tail end, while the higher finance costs and lower production rate also attributed to the weaker contribution from Vietnam joint venture. Revenue for the quarter slipped 76.6% YoY to RM9.7m.

• For 1HFY22, cumulative net profit fell 25.0% YoY to RM36.4m. The reported earnings came in at 30.7% of our forecasted core net profit of RM118.6m and 32.2% of consensus forecasted net profit at RM113.0m. The variance is mainly due to the weaker-than-expected contribution from Vietnam JV and delayed in recognition in certain construction projects. Still, we expect JAKS to declared dividends towards end-2022 as contribution from Vietnam JV stabilised.

• With the absence of orderbook replenishment in recent times, we expect a softer performance in the construction segment, while the balance EPC works at Vietnam is expected to be recognised only in 2HFY23. Moving forward, outstanding orderbook of more than RM200.0m will provide revenue visibility over the next 2 years. Meanwhile, JAKS tenderbook remain relatively unchanged at RM4.00bn, mainly in water infrastructure and building-related works.

• On the property investment segment, Pacific Towers Business Hub occupancy rate was unchanged from prior quarter at 31.0% will generate some mild contribution. JAKS remains committed over the re-purposing of Evolve Concept Mall (occupancy rate fallen to 52.0%, from 67.0% in 1QFY22). Nevertheless, occupancy rate in the latter is expected to improve after securing a number of car showrooms and food & beverage outlets, while an indoor basketball court will open in October 2022.

• Elsewhere, we gather that the progress of LSS4 project progress remains well on track with majority of earthworks were completed and is slated for commercial operation in 1Q23. The aforementioned project that may reduce the reliance of contribution from Vietnam and will be able to generate approximately RM10.0m per annum to bottom line over 25-year period.

Valuation & Recommendation

• Given the weaker-than-expected reported earnings, we trimmed our earnings forecast for FY22f and FY23f by 19.8% and 15.9% to RM95.1m and RM115.2m respectively. The downward revision is to reflect the (i) weaker-than-expected contribution from Vietnam JV, (ii) delay in construction billings in certain projects and (iii) higher finance costs. Still, we maintained our BUY recommendation on JAKS with a lower target price of RM0.47.

• Our target price is derived by sum-of-parts (SOP) approach as we ascribed a target PER of 7.0x to both its construction and property investment segments as we expect the pace of recovery to be measured. Meanwhile, we valued both its concession businesses (coal fired thermal power plant and LSS4) on a discounted cash flow approach.

• Risks to our recommendation and target price include lower-than-expected utilisation rate or unexpected increase in overhead cost in Vietnam IPP project. Delay in commercial operation date of LSS4. The Vietnam operations are denominated in USD whereby a firmer USD/MYR movement will be favourable and vice versa.

Source: Mplus Research - 26 Aug 2022