Summary

• Jaks Resources Bhd’s (JAKS) 3QFY22 core net profit fell 36.1% YoY to RM20.3m, dragged by larger losses from both the construction and property investment sectors and a RM14.0m expenses in relation to the issuance of Long-Term Incentive Plan (LTIP) that offset the slightly higher contribution from Vietnam’s Hai Doung venture. Revenue for the quarter declined 46.4% YoY to RM16.4m.

• For 9MFY22, cumulative net profit decreased 29.4% YoY to RM56.7m, making up to 59.6% of our forecasted core net profit of RM95.1m. The variance is mainly due to the weaker-than-expected contribution from Vietnam JV and larger-than-expected losses from both the construction and property investment segments.

• Meanwhile, we note that JAKS maintained a lean balance sheet in 3QFY22 with net gearing at 0.3x. With contribution from Vietnam turning stable, we reckon that dividends may start to trickle in 4QFY22 as well.

• We reckon that the construction segment may continue to bleed, given that 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.

• On the property investment segment, we expect the usual year-end kitchen sinking exercise to impact 4QFY22 results. Efforts to ramp up occupancy rates in both Pacific Towers and Evolve Concept Mall is expected to remain challenging, premised to the commercial property overhang situation, while retailers are now adopting the omnichannel to boost sales following the change consumer shopping behaviour and the acceleration in digital transformation.

• The LSS4 project is well on track for commercial operation in 1Q23. Upon commencement, the aforementioned project is expected to generate approximately RM10.0m per annum to bottom line over 25-year period. Elsewhere, there were no progress over the MoU entered with Qhazanah Sabah Sdn Bhd, while the MoU entered with T&T Group Joint Stock Company was lapsed on 11th September 2022.

Valuation & Recommendation

• Following the weaker-than-expected earnings, we trimmed our earnings forecast for FY22f and FY23f by 13.8% and 16.6% to RM82.0m and RM96.1m 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) larger losses from the property investment segment. Still, we maintained our BUY recommendation on JAKS with a lower target price of RM0.39.
• 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 - 29 Nov 2022