Jaks Resources (JAKS) has proposed to raise around RM47mRM55m through a private placement of up to 10% of its issued shares. The proposal did not come as a surprise given that their previous fund-raising exercise through the rights issue of warrants was undersubscribed by 63%. We are maintaining our BUY call with a higher TP of RM1.00, as we believe that the execution risk for the stock is lower (reduction in discount rate) despite the dilution.

Vietnam Is Still on Schedule

The main purpose of the issuance is to raise working capital for its Vietnam EPCC work, which is currently on schedule for completion by September 2020. We believe that management needs the additional funding, as they are aiming to complete the project ahead of schedule to take advantage of the strong demand for power in Vietnam. The overall project completion of the power plant is at 56% in March 2019, it was at 46% back in December 2018. We are also expecting higher recognition of progress in the coming months, as the fabricated machineries have started to arrive on site.

Lowering Debt to Improve Profitability

Part of the funding will be used to repay some of the loan outstanding related to the Pacific Star Project. The interest on those loans range from 6.0% - 7.9% per annum. The overall cost savings is estimated at RM0.6m or 0.5% of our forecast earnings for FY19-20E. Management is still guiding for the Pacific Star project to be completed by 1H19. The completion of the project is crucial for Jaks, as it has been diluting the profit gains from its Vietnam project and is weighting down on its working capital. Loss before tax for the segment could be reduced by half once Jaks completes the project.

Maintain BUY With a Higher TP to RM1.00

We are maintaining our BUY call, as we increase our TP to RM1.00 after factoring in lower execution risk despite imputing the dilution impact of the proposed private placement. We believe that at <5x PER for FY19-20E, stock PE valuation is still attractive. Downside risk to our call are 1) Wider losses from its property segment, 2) Lower than expected contribution from its EPC contract, and 3) Higher LAD charges.

Source: Affin Hwang Research - 19 Apr 2019