Investment Highlights

• We cut our FY17-19F forecasts by 47%, 7% and 6% respectively, and FV by 7% to RM0.74 (from RM0.80) but maintain our BUY call. Our FV is based on 13x revised FY18F EPS of 5.7 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.

• 1HFY17 results of Ikhmas missed expectations. It barely broke even with a net profit of only RM0.9mil, vs. our full-year forecast of RM22.1mil and full-year consensus estimates of RM29.1mil.

• However, we acknowledge that its 2QFY17 performance did improve sequentially, with a net profit of RM2.8mil vs. a net loss of RM1.8mil three months ago.

• Ikhmas said the subdued 1HFY17 performance was due to additional costs incurred for an infrastructure project, which we believe was the RM281.8mil Subang Skypark railway track project. However, the good news is that the project was 97% completed as at 30 June 2017.

• We cut our forecasts to reflect; 1) the actual weak margins realised in 1HFY17; and 2) slightly weaker overall margins in 2HFY17F and FY18-19F, taking into consideration the rising input costs, particularly steel (that typically makes up 7-8% of total cost).

• On a brighter note, YTD, Ikhmas has secured new jobs worth a total of RM369.2mil. 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 the MRT2, Pan Borneo Highway, SUKE and DASH, as well as those that are getting off the ground over the short to medium term such as the LRT3, ECRL and KL-Singapore HSR.

• Its earnings visibility is good, backed by a sizeable order backlog of RM882.7mil (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 - 5 Sept 2017