Litigation Impact (one-off) Is Manageable

We maintain our BUY call and 12-month TP of RM2.25 on Jaks Resources (Jaks) after meeting with management regarding the recent litigation, as we believe that the impact on both earnings and cash flow is manageable, even in a worst-case scenario. The current litigation has no impact on Jaks’ day-to-day operations, and current earnings growth will likely continue to be supported by its Vietnam EPCC contract.

LAD on Tower A (Star Tower) Is Unlikely to be More Than RM50m

We believe that in the worst-case scenario, where Jaks is liable for the liquidated ascertained damages (LAD) on Tower A (The Star Tower), the amount is only likely to be RM30m, based on the sale and purchase agreement (SPA) and assuming that Jaks can complete the building before the end of June. This is significantly lower than the corporate guarantee of RM50m that Star had called on. While it is up to the court to decide whether to grant the injunction on holding the RM50m payment, Jaks has also initiated an arbitration process to determine the final LAD cost and the party responsible for it.

Earnings Impact a One-off; Cash Flow Is Not a Problem

As Jaks has not made any provisions related to Tower A, it will have to absorb the cost in its P&L, should the court rule against its favour. However, as Jaks only owns a 51% stake in the company, the one-off impact to its P&L is still bearable at RM15.3m–RM25.5m or 18%-30% of its FY18E earnings. We believe that Jaks’ day-to-day operation will not be impacted by this, as Jaks is poised to receive around RM154m from a recent land disposal, which would be sufficient to cover the cost, as it is only obligated to repay RM54m of debt associated with the disposed land.

Share Price Correction Overdone; Maintain BUY With RM2.25 TP

We believe that the share price correction of 17% (since the Star claim) is overdone, as most investors have already factored in the worst-case scenario. We maintain our BUY call with an unchanged RNAV-based TP of RM2.25, as the valuation is undemanding at a 8.6x 2018E PER. Key downside risks would arise from: 1) the progress of its Vietnam project, 2) construction order book wins, and 3) delays in the Pacific Star project.

Source: Affin Hwang Research - 14 Mar 2018