Vietnam Remains the Jewel

We remain optimistic on Jaks Resources (Jaks) outlook post our recent meeting with management. We expect earnings growth to be stronger in 2H18, driven by the higher revenue recognition from its Vietnam EPCC contract; however, we are cutting our EPS for 2018E- 20E by 9.4-12.8% and our TP to RM1.75 (from RM1.90) after factoring in higher losses from the property segment and the higher share base from the recent share placement. Nevertheless, we are maintaining our BUY call due to its attractive valuation.

Stronger Construction Profit in 2H18 From Vietnam

Despite 1H18 PATAMI rising more than 44% yoy, earnings still fell short of our previous forecast, delivering only 32% of our full-year forecast. However, we believe that Jaks could deliver stronger earnings in 2H18, as we expect Jaks to start recognising stronger revenue contributions from its Vietnam EPCC contract. Earnings recognition (progress) for its EPCC contract has a similar schedule as an S-curve, and hence we expect its contribution to peak by 1H19. Management guided that the project is still on schedule for commercial operation in 2020.

Turning Around the Property Segment Is a Challenge

We believe that the biggest risk to our investment thesis is on Jaks’ property division, where both the property-development and mall-operation arms continue to be loss-making. We had previously assumed that Jaks would start handing the keys to its buyer (Pacific Star) by end-2018, but it has now been delayed until mid-2019. The delay was likely due to Jaks allocating resources from completing the Pacific Star (resident and office block) to completing the Star Tower, in our view. Jaks has also been appointed an external operator to help revamp its mall and reduce its expenses as well, but we believe that this will take some time for the benefits to materialise.

Maintain BUY Call With a Lower TP of RM1.75

We are maintaining our BUY call, while lowering our TP to RM1.75, on the back of EPS estimate cuts of 9.4-12.8% over 2018-20E, as we factor in higher property losses from the property delay and the higher share base. We still believe that the stock is undervalued, trading at 6.6x 2019E EPS.

Source: Affin Hwang Research - 20 Sept 2018