• Ikhmas posted a strong recovery in 3Q17 with profits growing by multifold to RM11m on timing of job recognitions and gain from sales of fixed assets.
• While 9M17 earnings grew 27% to RM12m, it still trailed our estimates to make up only 38% of our full year forecast and 42% of consensus as margins were impacted by higher raw material and input costs.

• While we expect earnings respite in 4Q17 as job recognition is back-end loaded, we believe higher raw material costs could set in. We downgrade FY17E/18E/19E by 37%/13%/2%.

• We downgrade Ikhmas to HOLD with lower TP of RM0.65 after applying 10% discount to the piling and foundation sub-sector PE of 13.4x PE on 18E EPS.

Rebound punctuated

Ikhmas posted a strong recovery as its 3Q17 net profits grew by multifold (on qoq and yoy basis) to RM11m amidst higher job recognition, sale of fixed assets and interest income. However, margins were under pressure; GP margin contracted 0.8ppts to 20.8% (3Q16: 21.6%) on the back of rising raw material price, labour, transport, fuel and regulatory compliance.

Short of expectations

With the strong 3Q17 rebound, 9M17 net earnings rose 27% to RM12m albeit with notable margin pressures following the weak 1H17 amidst timing of job recognition and higher input costs. Overall, 9M17 earnings made up only 38% of our FY17E estimates and 42% of consensus.

Challenging outlook

Following the weak earnings, we pared down our FY17E forecasts by 37%, FY18E expectations by 13% and trimmed FY19E estimates by 2% to reflect higher input costs. Despite Ikhmas’ strong job win record, we believe elevated steel prices would impact margins for its existing orderbook. It has secured over RM350m worth of new jobs in FY17; roughly making up 50% of its outstanding orderbook of c.RM700m.

Downgrade to HOLD with TP of RM0.65

We downgrade the stock to HOLD with a RM0.65 TP (from RM0.85), after applying a 10% discount to the subsector piling and foundation PE of 13.4x on its FY18E EPS.

Source: BIMB Securities Research - 29 Nov 2017