Addressing the Concerns on Property

We met up with Jaks Resources’ (Jaks) management for an update on the company outlook, post its decision to release the bank guarantee of RM50m to STAR. Despite the outcome, we believe Jaks still has sufficient cash balance to meet its operational needs, and hence our investment thesis on Jaks remains unchanged. Given its attractive valuations, we are maintaining our BUY call and TP of RM0.90. The earnings driver for Jaks over the next few years will be from its Vietnam IPP project, which is on track for completion by 2020.

Pacific Star Project Will Have a Closure by 2019

Jaks is committed to complete the Pacific Star project by end of 2019, which will reduce the losses for the segment by around RM2m/month, as it would no longer incur LAD cost post completion. Management is confident that the current cash balance of RM92m is sufficient to complete the project post the RM50m (or RM25.5 for Jaks 51% stake) payment to STAR. Although management guided that there is the possibility that they could claw back a portion of the payment made in an arbitration court, we have not factor that into our numbers. Our core-net profit forecast for FY18 remains unchanged as we view the payment as one-off.

The Turnaround of Evolve Mall Is Work in Progress

Although Jaks’ Evolve Mall is still loss making, management is targeting for the mall to achieve operational cash flow break-even by year-end, as they are in the midst of securing a few more tenants. Achieving positive cashflow for the mall is crucial for Jaks, as it will help to conserve its current cash balances before its Vietnam power plant starts contributing. We have forecasted losses from Evolve Mall to be around RM32-33m/year (Jaks owns a 51% stake) in 2018. The overall interest and repayment is around RM15m/year for the mall.

Maintain BUY Call and TP of RM0.90

We are maintaining our BUY call, while keeping our TP unchanged at RM0.90 although having made some adjustments on FY18E EPS to factor in the RM50m payment to STAR. We still believe that the stock is undervalued, trading at 3.2x 2019E EPS. Catalyst for the stock will be earnings delivery in FY19E, supported by the EPCC contract contribution.

Source: Affin Hwang Research - 18 Jan 2019