Jaks Resources (JAKS) PATAMI of RM17.8m (+136% yoy) came in slightly below expectation, delivering only 20% of our full year forecast, but we are expecting stronger earnings contribution from the Vietnam EPC contract ahead. Although we have lowered our TP to RM1.90, on the back of 11.5%-12.5% EPS cut, to factor in the enlarged share base and higher losses from the property segment, we still believe the stock is undervalued trading at only 8.8x 2019E PER. Maintain BUY.

Vietnam Continues to Deliver

The Vietnam EPCC contract remains the main earnings driver for Jaks, as it contributed around RM25.2m (+69% yoy) to the group profit. We are expecting stronger progress recognition in the coming quarters, as they will start receiving equipment that are fabricated offsite and contribution in 1Q tends to be seasonally lower too due to the festive season. Management is guiding that the project is still on track to start commercial operations by 2020. Construction earnings from the EPCC contract is expected to peak in 2019.

Future in Vietnam, But Needs to Fix Local Problem First

The property segment continues to be the drag for the group due to the LAD cost (RM7.6m in 1Q, +5.6% qoq and 24.6% yoy) associated to the late delivery of the Pacific Star project and the loss making mall. We are expecting the LAD cost to minimize in 2019 with the project completion by 2018. Management has also indicated that they are actively exploring several renewable energy (RE) projects in Vietnam, which will help to compensate for the shortfall in construction earnings in 2020.

Maintain BUY With Lower TP of RM1.90

We maintain our BUY call on JAKS, despite lowering our RNAV-based 12- month TP of RM1.90. We believe that the stock valuation is still undemanding, trading only at 8.8x 2019E PER, despite lowering our EPS by 11.5%-12.5% for FY18-20E mainly to factor in the enlarged share base post the 10% placement exercise. The key risks will likely arise from: 1) the progress of its Vietnam project, 2) construction order book wins, and 3) the timing and value of the disposal of its non-core assets.

Source: Affin Hwang Research - 24 May 2018