Ibraco’s 1H18 core PATMI of RM7.4m (+16.7% YoY) was below expectations, mainly due to lower-margin product mix and delay in revenue recognitions. Higher overall YoY results came from new contributing projects despite lower margin. Stronger subsequent quarters are expected given its 2.4x cover of unbilled sales and outstanding construction order book of RM241.9m. We lower our FY18/19/20 earnings by 47%/36%/17% respectively, after revising our margin, take-up rate and revenue recognition assumptions. Maintain BUY with lower RNAV-derived TP (40% discount) of RM0.77.

Below expectations. 1H18 revenue of RM81.8m translated into a core PATMI of RM7.4m, accounting for 19.1% and 24.0% of HLIB and consensus full year forecasts, respectively. The deviation was mainly due to lower-margin product mix and delay in revenue recognitions.

Dividend. None (2Q17: None).

QoQ: 2Q18 revenue rose 51.9% due to the higher recognitions and more ongoing projects as compared to 1Q18. Core PATMI improved by 118.8% to RM5.1m on the back of higher overall margin.

YoY: Revenue improved by 120.9% with improved contributions from new projects and construction work. Nevertheless, core PATMI only increased by 68.7% due to ongoing projects’ lower margin, higher staff and marketing costs.

YTD: Core PATMI rose 16.7% on the back of higher revenue (97.7%), resulting from new contributing projects such as Continew, SOHO from TT3, sales of office building at the NorthBank and construction work in Mukah Airport. The lower magnitude of improvement was mainly due to lower-margin product mix, higher staff cost as well as higher marketing cost due to the adoption of MFRS 15.

Outlook. Earnings is on course to rebound in FY18 with expectation of stronger quarters ahead with higher progressive billings, underpinned by unbilled sales of RM267.8m (1Q18: RM330.0m), which represents a healthy cover ratio of 2.4x on top of its construction order book of RM241.9m.

New sales of RM148m were achieved in 1H18 with slower sales in 2Q of RM48m due to GE14 factor. Management is maintaining its full year target of RM350m in view of 3Q18’s improving sentiment .

Forecast. We lower our FY18/19/20 earnings by 47%/36%/17% respectively, after revising our assumptions for (i) lower margin; (ii) delay in revenue recognitions; and (iii) slower sales take-up rate for its major projects.

Maintain BUY with lower TP of RM0.77 (was RM0.86), derived based on total RNAV of RM1.27 and unchanged 40% discount on RNAV for property segment. Despite the continued disappointment in results, we anticipate FY18 to be an inflection point where earnings are expected to stage an upcycle from here on. The earnings visibility is underpinned by its high unbilled sales of 2.4x cover and more aggressive launches and sales target, supported by the increasing visibility on its construction arm.

Source: Hong Leong Investment Bank Research - 27 Aug 2018