• Ikhmas Jaya posted 1QFY18 profit of RM4.9m from a net loss of RM1.9m in 1QFY17. The setback in 1QFY17 earnings were due to delay in finalizing accounts.

• Management expects a challenging outlook. We reduce our FY18- 20F forecasts by 52%-85% on lower orderbook replenishment rate and margins assumed.

• Downgrade to SELL with lower TP of RM0.22 (from RM0.51). The recent accounting irregularities and its deteriorating balance sheet does not inspire confidence, in our view.

Margin normalisation uplifted its earnings

Ikhmas Jaya 1QFY18 posted net profit of RM4.9m from a net loss of RM1.9m in 1QFY17 as margin normalise. 1Q17 earnings was impacted by delay in finalizing its accounts. The turnaround was also attributed to the increase in construction volume as most of the projects have moved into the acceleration phase.

Prudent approach amidst challenges ahead

Management plans to focus on design and build of civil works from the public sector as seen with jobs secured in Apr 2018. We believe this could lead to lower orderbook replenishment rate amidst stiff competition and the new administration’s prudent development expenditure approach. Additionally, it also expects margin to come under pressure owing to higher input and regulatory compliance costs.

Revised down our earnings forecast

As such, we pare down FY18-20F earnings by 52%-85% on reduced orderbook replenishment rate of RM300m (from RM500m) and lower PATAMI margin by 3-7ppts (Table 2).

Downgrade to SELL with lower TP of RM0.22

We downgrade to SELL with lower TP of RM0.22 (from RM0.51) after lowering our PE multiple to 10x (a 10% discount from the previous multiple of 11.1x). The reduced multiple reflects our concern over the recent accounting irregularities issue highlighted and challenging industry outlook. We note that balance sheet is also deteriorating with net gearing ratio increasing to 0.55x from 0.44x in 4Q17.

Source: BIMB Securities Research - 1 Jun 2018