Jaks Resources (JAKS) reported a very weak set of numbers, 9MFY18 core-PATAMI of RM22m (+25.4% yoy) came in below consensus and our expectation, delivering only 30% and 31% of respective forecast. The significant drop in progress billings for the Vietnam EPC construction work in the 3Q18 came as a negative surprise to us. Nevertheless, we are still optimistic that the project will complete on time, but have revised lower our TP to RM0.90 (fully diluted), while maintaining our BUY call.

Vietnam Project Still on Track

Despite the Vietnam power plant project having achieved 41% completion, Jaks was only able to recognize less than 30% for their works, as revenue recognition is based on completion of works rather than milestone basis. Management has assured us that they will be able to meet the COD dateline by mid-2020, as such we are assuming a higher progress billing in 2019/2020 to make up for the differences. Contractors are focusing on the main boiler units as machineries are brought on site, and hence there are fewer workers to work on Jaks EPC contract portion.

Continue to Work on Pacific Star Project

Losses from the property segment continued to widen, as LBT for the segment rose to RM17.7m in 3Q18 from RM15.9m (excluding land sales gain) in 2Q18. The increase in losses is due to LAD losses arising from the Pacific Start project, which management is now targeting for completion by 1H19. We are expecting the losses to continue until the project is completed. Losses from the mall have narrowed to RM6.4m from RM7.5m in 2Q18. Although the amount is relatively small, we believe it is in the right direction to achieve operational break-even by end 2019.

Maintain BUY With Lower TP of RM0.90

We have cut our EPS for FY18 by 54% factoring in lower progress work, but have increase our EPS for FY19/20E by 22% as we assume works that were not completed in FY18 will be rolled over to FY19 and FY20. However, we have cut our TP to RM0.90 factoring in the warrants issued, and also lowered the valuation for its construction segment. However, we are keeping our BUY call.

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 - 30 Nov 2018