Investment Highlights

• We cut FY18-19F net profit forecasts by 21% and 22%, trim our FV by 4% to RM0.71 (from RM0.74), but maintain our BUY call.

• Our FV is based on 13x revised FY19F EPS of 5.44 sen (rolled forward from FY18F), 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.

• The earnings downgrade is largely to reflect actual job wins in FY17 of only RM372.8mil vs. our expectations of RM500mil, coupled with a slightly weaker outlook for margins.

• Ikhmas' FY17 core net profit of RM9.7mil (excluding RM4.6mil gains on disposal of fixed assets) missed our forecast and consensus estimates by 18% and 33% respectively. The key variance against our forecast came from higher costs and some delay in finalisation of accounts of completed projects.

• The same issues resulted in FY17 core net profit declining 14% YoY, despite the topline growing by 23%.

• We are giving Ikhmas the benefit of the doubt that these issues will be addressed and gradually resolved from FY18. Our forecasts also assume an order book replenishment of RM500mil annually in FY18-20F, against a backdrop of a robust construction market locally. YTD, Ikhmas has only secured one contract, i.e. RM38.5mil bored piling works for LRT3.

• 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 RM631.8mil (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 Mar 2018