Jaks Resources (JAKS) reported a decent set of results, 1H19 numbers – core PATAMI of RM76m (+206% yoy), beat both market consensus and our forecasts, delivering 67% of both estimates. The increase in liquidated ascertained damage (LAD) charges was lower than our expectations, and contributed to the earnings surprise. Its Vietnam power plant project is on track to be completed by 2019/20. We are reaffirming our BUY call and 12-month target price of RM1.00, as we believe Jaks’ earnings delivery is sustainable.

Vietnam Power-plant Progress Continues to be on Track

Revenue from its EPC contract has fallen by 11% qoq to RM226m in 2Q19. But management has guided that the progress for its power plant remains on track. Hence, we are maintaining our target completion rate unchanged at 83% for 2019. Although the revenue recognition is peaking based on the S-curve, there is still some variation during some quarters, as the quarters are dependent on delivery of the machinery. Based on the current progress, we still do not discount that the power plant (first unit) could be completed ahead of schedule, ie, before mid-2020. The EPC contract continues to the key driver for Jaks’ earnings growth in 2019/20.

Still Waiting for the CCC

Despite the better-than-expected results, we maintain our EPS forecasts, as we believe the LAD charges are likely to increase in coming quarters. We had previously expected Jaks to start delivering the keys by June. However, management is now guiding that the handover for the Pacific Star project is more likely to occur by year-end. Management also mentioned that the Star Tower is completed and is awaiting the Certificate of Completion and Compliance (CCC) from the government authorities.

Reaffirm BUY Call and TP of RM1.00

We are keeping our forecasts unchanged, despite the better-thanexpected operating performance, as we are assuming higher LAD charges in the coming quarters. We are maintaining our SOTP-based 12-month TP at RM1.00 and reaffirming our BUY call on Jaks for its undemanding valuation. We believe a near-term catalyst would be the handover of The Star Tower within the next few months. Downside risks to our call are: 1) wider losses from its property segment; 2) slower earnings recognition on its Vietnam EPC contract; and 3) equity dilution from possible fund raising.

Source: Affin Hwang Research - 22 Aug 2019