Summary

• Jaks Resources Bhd’s (JAKS) 1QFY23 core net profit fell 33.4% YoY to RM14.1m, dragged down by lower contribution from Vietnam due to higher interest expenses  arising from the rising interest rates. Revenue for the quarter contracted 20.7% YoY  to RM14.2m.

• The weaker-than-expected core net profit, accounts to 14.6% of our forecasted core  net profit of RM96.2m. The variance was mainly due to the weaker-than-expected  contribution from Vietnam. Still, we reckon that earnings sustainability from  Vietnam may continue to cushion the weakness in the local operations.

• Moving forward, the construction segment will focus onto the completion of  outstanding orderbook of c.RM200.0m. We gather that the tenderbook remains  healthy at RM2.00bn, mainly for hospital-related and water-related infrastructure  jobs in relation to flood mitigation projects. We have imputed an orderbook  replenishment assumption of RM50.0m for FY23f.

• On the property investment segment, efforts to ramp up occupancy rates in both  Pacific Towers and Evolve Concept Mall remain in place. The building management  of Evolve Concept Mall was replaced in April 2023 in bid to rejuvenate the current  dire situation. Still, we reckon that turnaround efforts may be challenging, owing to  the oversupply of commercial floor space.

• Elsewhere, the LSS4 project was completed (6 months ahead of scheduled  commercial operation date) and aims to commence the commercial operations  sometime in mid-June 2023. The group will continue to explore greenfield projects  and acquisitions within the renewable energy sector in both Malaysia and Vietnam.  With the completion of LSS4, JAKS will be eyeing a slice of 600MW of Corporate  Green Power Programme (CGPP) programme from Malaysia’s Energy Commission.

• JAKS is undertaking a private placement exercise and proceeds will be utilised to  repay existing debts and fund working capital. We reckon that the move is  essential, given that the group is operating in a negative net cash flow position over  the past 8 quarters.

Valuation & Recommendation

• Following the weaker-than-expected reported numbers, we trimmed our core net  profit forecast by 29.2% and 28.6% to RM68.2m and RM71.3m for FY23f and FY24f  respectively, adjusting to the weaker contribution from Vietnam. Still, we  maintained our BUY recommendation on JAKS with a lower target price of RM0.27.

• 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 - 30 May 2023