Investment Highlights

• We cut our FY17-19F forecasts by 27%, 22% and 20% respectively, but maintain our BUY call and raise our FV by 5% to RM0.80 (from RM0.76) as we roll forward our valuation base year to FY18F (from FY17F).

• Our FV is based on 13x FY18F EPS of 6.13 sen, at a slight premium to our 1-year forward target PE of 10-12x for small-cap construction stocks, to reflect a relatively less competitive piling segment vis-à-vis general contracting.

• Ikhmas dipped into the red with a net loss of RM1.8mil in 1QFY17, missing our full-year forecast as well as fullyear consensus estimates of both a net profit of RM30.6mil. Ikhmas quoted its inability to finalise accounts by 31 Mar 2017 for certain completed projects as the key reason for the losses.

• We cut our forecasts to reflect reduced margins: (1) as a couple of key projects are taking a longer time to get into the full swing due to delays in the site handover and unforeseen underground utilities affecting work progress – which translate to additional costs; and (2) due to high variation order claims – of which the amounts are normally recognised immediately as costs, only to be reversed as incomes once the claims are approved by the clients, which is typically a long-drawn process.

• YTD, Ikhmas has secured new jobs worth a total of RM143.9mil. Our forecasts assume an order book replenishment target of RM500mil annually in FY17-19F, which is consistent with Ikhmas' job wins of RM495mil in FY16.

• We continue to like Ikhmas as it is a good proxy to the booming piling/foundation segment underpinned by current mega infrastructure projects such as MRT2, Pan Borneo Highway, SUKE and DASH, as well as those getting off the ground over the short to medium term such as LRT3, ECRL and KL-Singapore HSR. Its earnings visibility is strongly backed by a sizeable order backlog of RM693mil (Exhibit 2) which will keep it busy for the next 12-24 months. The entry barrier to the sector is high given the high costs of equipment and machinery as well as the limited availability of experienced operators

Source: AmInvest Research - 1 Jun 2017