We are upgrading our rating on Jaks Resources (Jaks) to BUY from HOLD while maintaining our TP at RM1.50. The recent share-price correction leaves Jaks’ current valuation at an undemanding 7.2x FY18E PER, in our view. We believe that as the delay in Pacific Star is resolved in 2018, the catalyst for the stock will turn to the progress of its Vietnam power-plant project.

Pacific Star Project Can be Completed by 2018

Management is targeting to complete the overdue Pacific Star project by the end of 2018, as Jaks has secured the necessary financing recently together with unbilled sales of close to RM190m. The completion of the project will also enable Jaks to dispose the business hub (previously retail podium), which was recently valued at RM240m, and lower the group’s gearing. There could be downside risk to our forecast if Jaks fails to meet the targeted schedule, as it will have to recognise higher LAD costs.

Completion of the Project Can Help to Reduce Losses

The losses from its property segment are derived from both its Evolve Concept City Mall and Pacific Star. Although the turnaround of Evolve will take some time, the losses from Pacific Star can be reduced, as they are mainly caused by LAD costs related to delays in project completion. LBIT from the property segment was RM18.0m in 1HFY17, while EBIT for the group was only RM3.4m, and the LAD cost from the delay was RM13.0m.

Better Prospects Ahead

We are also expecting a higher construction profit from both its domestic and Vietnam projects, coupled with a RM110m one-off net gain arising from the proposed land disposal to be recorded in 2H17. Management has indicated that the proceeds from the disposal will be used to lower its current gearing ratio from 0.84x to 0.43x. We have also tweaked our EPS forecast to reflect the recent disposal gains in FY18-19E, while lowering our EPS in FY17E to reflect higher corporate costs.

Upgrade to BUY With An Unchanged TP at RM1.50

We upgrade our call to BUY from HOLD with an unchanged RNAV-based 12-month TP of RM1.50 based on its current valuation. The key downside risks will likely arise from: 1) the progress of its Vietnam project, 2) domestic construction order book wins, and 3) higher-than-expected losses from its property segment.

Source: Affin Hwang Research - 17 Oct 2017