Jaks Resources (JAKS) reported a decent set of results: 9M19 core PATAMI of RM101m (+359% yoy) is above consensus and our expectations, delivering 88% of both estimates. The beat was due to a higher-than-expected contribution from its Vietnam EPCC contract, in which we were expecting a slowdown after a strong 1H19. Although we raise our 12-month target price to RM1.20 (fully diluted) as we lower our discount rate due to the increased certainty in the delivery of the Vietnam Power Plant and the completion of the Pacific Star by 2020, we downgrade the stock to a HOLD from Buy.

Hai Duong Power Plant Is Progressing Well

Although revenue for its EPCC contract declined to RM168m in 3Q19 from RM226m in 2Q19, it was still significantly higher than our forecast, as we were expecting a slow-down in revenue due to the sharp increase in revenue recognition in 1H19. Construction revenue/profits will no doubt be lower in 2020, as there is less than 20% of the RM1.9bn EPCC contract to be recognised. The overall completion of the power plant (600MW x 2) is at 82%, and we believe that management can deliver the first unit on schedule by 2Q20, and the second unit 6 months later. Earnings from the power generation will only start to materialise in 2H20.

Losses From the Property Segment Will Extend Into 2020

Despite the better-than-expected results, we lower our EPS forecasts for 2020/21 by 32% and 6% respectively to factor in the LAD charges arising from the delay in the completion of the Pacific Star projects. Management had previously guided that the overall project will be completed by end- 2019; however, we believe that the whole project may only be completed earliest by mid-2020. Nevertheless, there are some positive developments, as the Business Hub and Car Park has obtained the certificate of completion (CCC).

Downgrade to HOLD Despite Higher TP at RM1.20

We are revising our forecasts for FY19-21E by +7.9%/-32.2%/-6.3%, to factor in the recent developments of Jaks. The cut in earnings for FY20- 21E is to factor in the higher losses from the LAD charges for the property development project. However, we are raising our 12-month SOTP-based TP to RM1.20, as we lower our discount rate to 10% from 25% on Jaks, as we believe that the Vietnam project would likely be completed on time without any major hiccups, and the Pacific Star project will reach a conclusion before the end of 2020.

Risks to Our Call

Downside risks to our call are; 1) wider losses from its property segment; 2) slower earnings recognition on its Vietnam EPCC contract; and 3) equity dilution from possible fund raising. Upside risk are: 1) wining new RE contracts in Vietnam; 2) the earlier-than-expected handover of the Pacific Star project; and 3) the quick turnaround of its loss-making Evolve Concept City Mall.

Source: Affin Hwang Research - 26 Nov 2019