Investment Highlights

• We cut FY18-20F net profit forecasts by 34%, 14% and 13% respectively, reduce our FV by 14% to RM0.61 (from RM0.71), but maintain our BUY call. The earnings downgrade is largely to reflect weaker margins from older jobs.

• Our FV is based on 13x revised FY19F EPS of 4.7 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 has been awarded two contracts worth a total of RM257.7mil comprising: (1) design and build for the Kajang Hospital (RM199mil) by Naluri Rezeki Sdn Bhd; and (2) demolition of existing buildings, followed by substructure works on Lot 155, Jalan Ampang (RM58.7mil) by Putrajaya Ventures Sdn Bhd.

• The latest contracts have boosted Ikhmas’ YTD job wins to RM296.2mil, and its outstanding order book to RM890mil (Exhibit 1). We are keeping our order book replenishment assumption of RM500mil annually in FY18-20F.

• During a recent meeting, Ikhmas guided for a strong pipeline of new jobs in FY18. It expects its job wins to rise to about RM400mil by the end of 1HFY18. It hinted at a sizeable public infrastructure job. For 2HFY18 and beyond, similarly, Ikhmas has identified and will be pursuing various building, road, bridge and other infrastructure jobs worth RM500mil to RM1bil.

• On a more downbeat note, Ikhmas guided for weak margins in FY18. Ikhmas will see various projects secured during FY15-16 completing during FY18. A number of these projects have been affected by delays, resulting in unbudgeted project management cost as well as input cost inflation beyond the original completion timelines. These additional costs are not immediately recoverable from the clients.

• Despite the weak margins, we still project Ikhmas’ net profit to grow by 55.3% in FY18F from a washout in FY17. Subsequently, improved margins should drive another 65.1% rise in net profit in FY19F.

• We continue to like Ikhmas for: (1) the bright prospects of the piling/foundation segment backed by various mega projects; (2) its strong earnings visibility underpinned by a sizeable order backlog; and (3) the high entry barrier to the sector given the high costs of equipment and machinery and limited availability of experienced operators.

Source: AmInvest Research - 10 Apr 2018