• From water to power. JAKS (listed in July 2014) is principally involved in water supply & infrastructure construction projects, manufacturing of pipes, and property development. Additionally, the group has secured an independent power plant (IPP) contract to construct two 600-MW power plants in Hai Duong, Vietnam on a Build-Operate-Transfer (BOT) basis, via a 30:70 JV with China Power Engineering Consulting Group Co. Ltd (CPECC).

• Silver lining ahead? After hitting a 12-year high of RM1.79 on 5 Apr 2017, share prices tumbled 20.7% to a low of RM1.42 on 22 & 23 June, as sentiment was dampened by persistent concern of a sluggish outlook from its investment property i.e. Evolve Concept mall (opened late 2015) coupled with liquidated and ascertained damages (LAD) from its Besut and Pacific Star projects.

• However, share prices managed to recover to end at RM1.49 on 23 June amid positive expectations from a turnaround in 1Q17 results following strong contributions from its Vietnam EPC (engineering, procurement and construction) project, helping to cushion the negative outlook from its property division. Going forward, JAKS construction division is expected to remain the main pillar for the group’s profitability in the next two years underpinned by an outstanding order-book size of RM2.6bn of which ~60% are from Vietnam while the remaining from Malaysia.
   
• Asset disposal still on the cards. Management said it has sped up construction work on the Pacific Star project (to be completed by end- 2018). While net gearing had significantly improved to 0.63x in 1Q17 (or equivalent to ~RM400m netdebt) from a peak of 0.9x in FY16 (following the recent placement of new shares which raised ~RM60m), management has always been looking for suitors for de-gearing exercises via the disposal of its Evolve Concept mall and its landbank in USJ measuring c.15 acres (to raise RM400-500m proceeds).
   
• Ripe for downtrend reversal? At RM1.49, JAKS is trading at 1.25x P/B (12% below its 10-year average P/B of 1.42x), supported by RM2.6bn orderbook and 25% EPS CAGR for the period FY17-19. We believe such valuations and the recent price fixing of long term incentive plan options at RM1.40 could have priced in most of the negatives, providing sufficient margin of safety to cushion further plunge in share prices.

• Given the formation of bullish white candlestick (daily chart) and the long legged doji pattern (weekly chart), we expect prices to creep up further in the near term. A decisive breakout above the immediate resistance of RM1.51 (10-d SMA) will likely to lift share prices higher towards RM1.56 (downtrend line) and RM1.61 (23.6% FR) before reaching our LT target at RM1.75 (weekly upper Bollinger band). On the flip side, key supports are RM1.42 and RM1.40. Cut loss at RM1.38.

Source: Hong Leong Investment Bank Research - 28 Jun 2017