Investment Highlights

• We maintain our forecasts, FV of RM0.74 and BUY call. Our FV is based on 13x 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.

• Ikhmas' 9MFY17 core net profit of RM6.9mil (excluding gains on disposal of fixed assets and properties) came in at only 58% of our full-year forecast. However, we consider the results within our expectations as the 9MFY17 number was distorted by losses in 1QFY17. As against market expectations, Ikhmas disappointed with 9MFY17 net profit making up only 33% of full-year consensus estimates.

• 3QFY17 performance improved strongly sequentially with a core net profit of RM7.4mil, as Ikhmas had finally shrugged off various project execution issues. This compares with a RM1.3mil net profit in 2Q and a net loss of RM1.8mil in 1Q.

• Cumulatively, 9MFY17 net profit declined 29% YoY largely due to additional costs incurred for an infrastructure project (which we believe was the RM281.8mil Subang Skypark railway track project).

• 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 for the bright prospects of the piling/foundation segment backed by the rollout of the Pan Borneo Sarawak highway (RM16bil), MRT2 (RM32bil) and LRT3 (RM12bil) in recent years, to be followed by another wave of mega projects including the Pan Borneo Sabah highway (RM12.8bil), East Coast Rail Link (RM55bil) and KL-Singapore high-speed rail (RM50- 60bil) over the medium term.

• In the basic infrastructure space, the government remains committed to spending on roads, bridges, schools, hospitals, public housing, water and electricity supply. Under Budget 2018, despite financial constraints, the gross development expenditure has been kept at 2017's level of RM46bil.

• Ikhmas' earnings visibility is strong, underpinned by a sizeable order backlog of about RM694mil (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 - 29 Nov 2017