Awaiting Construction Pick-up

We are downgrading our call on Jaks Resources (JAKS) to HOLD from Buy, mainly as we expect limited upside subsequent to the strong share-price rally. Our target price is unchanged at RM1.70. The 1Q17 PATAMI of RM7.5mn (>100% QoQ; >100% YoY) represents only 12% of our full-year forecast; however, we expect a stronger 2H due to higher construction activity both in Malaysia and Vietnam.

Stronger Recovery From Vietnam EPC Contract

Management said the company has achieved close to 18% completion as of 1QFY17. The relatively low completion rate of 3% for the quarter could be attributed to slow construction activity during the Chinese New Year period. We expect higher recognition in coming quarters as construction work should pick up towards a 28% completion rate by the end of the year. The revenue contribution from Vietnam in 1Q17 was RM62mn, which is in line with our RM363mn target for the year.

Local Construction Work Could Provide Upside

Despite the revenue contribution from local construction work having fallen to RM58mn (-44% QoQ; -20% YoY), we still expect the run rate to normalise in the next few quarters and contribute around RM320mn in revenue in FY17. The margin for the segment could also surprise on the upside in FY17, as management has pointed out that some of the work is already close to completion. Although JAKS has not won any new orders YTD, management remains optimistic that the company should be able to replenish close to RM500mn of new orders by year-end.

Property Dragging Down Group Profitability

JAKS’s property division continues to be loss making, due to the LAD penalty from its Pacific Star Project and losses from its Evolve Concept Mall. Management said it has sped up construction work on the Pacific Star project, which is on schedule to be completed by end-2018. Management is still looking for a buyer for its Evolve Concept Mall; however, we believe this will be challenging given the oversupply of retail mall space at the moment.

Reduce to HOLD With Unchanged TP of RM1.70

We are downgrading our call on JAKS to HOLD from Buy, mainly as we expect limited upside to our unchanged RNAV-based 12-month TP of RM1.70. We make no change to our EPS forecasts, as we expect a stronger 2H earnings contribution from the group’s construction segment.

Source: Affin Hwang Research - 25 May 2017