Investment Highlights

• We maintain our forecasts, FV of RM0.61 and BUY call. Our FV is based on 13x FY19F EPS of 4.7sen, 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.

• This follows the restatement of Ikhmas’ headline FY17 net profit number, which was down by 52% to RM6.9mil from RM14.3mil. We have restated its FY17 core net profit at RM1.8mil, down by 81% from RM9.7mil accordingly.

• The RM7.4mil downward adjustment in FY17 headline net profit number was largely to rectify RM6.0mil overstatement of capitalisation of depreciation charges (or under-reporting of depreciation charges). The balance came from minor adjustments in tax and impairment of deposits and receivable.

• Ikhmas said that the restatement arose from a “genuine error”. There was neither implication on its cash flow, nor its future profitability. While the latest development may hurt the trading sentiment on the stock, it should not alter the fundamentals of Ikhmas.

• We project a strong earnings recovery for Ikhmas in FY18-19F from a washout in FY17, backed by a sizeable order book of RM991.4mil (Exhibit 1) and improved margins.

• 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 - 27 Apr 2018