• Jaks Resources (JAKS) announced that they would be disposing its lossmaking property arm, JIC, for RM1 to Island Circle Development
• We view the disposal as a positive and believe the share price could react positively, as the Pacific Star project has been loss making, and also dragged JAKS with cash-flow problems
• We maintain our BUY call on the stock and raise our RNAV-based TP to RM1.00, post disposal

Getting More Than Just RM1

Although Jaks is disposing its loss-making property development arm, Jaks Island Circle (JIC) for RM1 only, we still view the deal positively as it will push Jaks back to profitability while easing some of its cash-flow problems. The acquirer will assume all the liabilities related to JIC, while taking control over the Pacific Star project (Office and Residential). Jaks which has a 51% stake in JIC will record a disposal gain of around RM71.9m. The acquirer, Island Circle Development (ICD) owns the remaining 49% stake in JIC. Jaks currently still owns a 100% stake in the business hub (and car park) in Pacific Star and is not included as part of the deal.

Helps Ease Possible Cash-flow Problems

JIC has been loss making over the past 2-3 years due to liquidated and ascertained damages (LAD) incurred due to the late delivery of both the residential and office units in the Pacific Star project. Although JIC is expected to start delivering the units to its buyer by end of this year, JIC would still need to raise new funding to pay the buyers the LAD owed which is currently around RM165m (accumulated since 4Q16). Apart from that JIC also owes JAKS around RM35.4m, which JAKS had previously loaned to JIC for the construction cost and bank guarantee of the Pacific Star project.

Maintain BUY With a Higher TP of RM1.00

Given that we had previously assumed that JIC will deliver all the units in Pacific Star by end-2020, we have kept our earnings forecast unchanged for 2021/22E. We have raised our 2020E earnings by 7% due to the absence of losses from JIC. However, we raise our RNAV-based 12-month TP to RM1.00 (from RM0.88), as we had previously ascribed a negative value of RM130m to JIC. Downside risk to our investment thesis, are delays to the completion of its Vietnam power plant, and higher losses from Evolve Concept Mall.

Source: Affin Hwang Research - 30 Sept 2020