Jaks Resources (JAKS) 1H18 PATAMI of RM24.2m (+44.7% yoy) came in below expectation, delivering only 32% of our full year forecast. 2QFY18 saw lower progress billings for the Vietnam EPC construction work, and higher LADs in the property division. However, we are expecting stronger earnings contribution from the Vietnam EPC contract ahead. We maintain our BUY call with an unchanged TP of RM1.90. We believe the stock is still undervalued trading at 8.8x 2019E PER.

Better 1H18 Performance

JAKS recorded a stronger set of 1H18 results, with higher PATAMI of RM24.8m (+44.7% yoy). This was largely due to stronger revenue growth, underpinned by the construction division’s Vietnam EPC construction work. Consequently, pretax profit also improved from a pretax loss of RM1.6m to a pretax profit of RM16.8m due to higher progress billings from the Vietnam EPC construction works. However, the strong performance by the construction sector was dampened by wider core losses in the property segment, mainly due to higher LAD incurred.

Vietnam Still a Beacon

On a quarterly basis, JAKS produced a softer set of result where revenue and core net profit saw a decline by 15% and 28% respectively. The weaker performance was attributable to lower progress billings recognised in 2Q18 compared to 1Q18 and higher LAD incurred of RM8.3m from the property segment. Losses from the property division was partially offset by a RM5.8m gain from the disposal of USJ Land properties. Despite a weaker 2Q results, we are expecting stronger progress recognition in the coming quarters, as they will start receiving equipment that are fabricated offsite. 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.

Maintain BUY With Unchanged TP at RM1.90

We maintain our BUY call and our RNAV based TP at RM1.90. The rerating catalyst for the stock will be the progress of its Vietnam power plant project. Downside risks to our call are 1) wider losses from its property segment; and 2) slower recognition from its Vietnam EPC contract.

Source: Affin Hwang Research - 29 Aug 2018