Result

• Ikhmas Jaya posted net profit of RM0.2m for its 3QFY16, which plunged 95.7% qoq and 97% yoy. Similarly, revenue retreated 18.8% qoq and 20% yoy. The unappealing performance was mainly due to lower revenue being recognized in current quarter as certain projects was facing hindrance to progress.

• Below expectation. Hence, 9MFY16 Net profit of RM9.7m only accounted for 36.8% of our full year earnings forecast of RM26.33m.

Comment

• Lacklustre quarterly performance caused by lower revenue and compounded by lower gross profit margin. The lacklustre performance in 3QFY16 was mainly due to lower revenue being recognized as certain projects’ progress took a breather due to technical issue on counter party. Furthermore, the margin was also compressed due to additional cost incurred in an infrastructure project coupled with additional cost take up in final accounts of 2 pilling projects.

• Cumulative 9MFY16’s revenue slid 19.5% yoy with net profit dived 57.4% yoy. The slide in 9MFY16’s revenue to RM164.4 from RM204.3m was due to completion of a building construction project and 2 piling projects in 9MFY15 as compared to pro-longed hindrance for certain projects in 9MFY16. Furthermore, 9MFY16’s net profit was fazed by additional cost being booked in under Subang Skypark railway track project with 95% completion. We learnt that it was mainly attributed to additional materials and manpower incurred correspondingly with counter party’s request to speed up the project. Unfortunately, extra costs might be only recovered beyond FY16. As such, 9MFY16’s net profit margin eroded 5.27 pts to 5.93%.

• Looking forward, the group’s performance will continue embroiling in current doldrums but ameliorate in FY17. We understand that the group will book in the additional cost incurred within FY16, therefore expecting an insipid performance in 4th quarter. Nevertheless, we anticipate the earnings to pick up in FY17 given the scant progress billings in FY16 to regain its strength and recover in FY17.

• Meanwhile, the Group’s clear earnings visibility is anchored by current outstanding order book of RM520m, which translates into 1.9x FY15’s earnings given a margin of 9%. Meanwhile, we believe the Group is able to secure more jobs ahead and further replenish its order book. We understand that the Group is in high chance of getting another few more contracts in piling and building works totalling RM400m in coming months.

Earnings Outlook/ Revision

• We slashed our earnings forecast for FY16 and FY17 by 48% and 17% respectively mainly due to lower than expected revenue recognized given unforeseen event and additional cost incurred in FY16.

Valuation/Recommendation

• Maintain BUY with lower target price of RM0.76 (previously was RM0.90) after adjusting earning forecast and pegged with 13x FY2017F PE. The target PE assigned is at the range of upcycle PE for small-and-mid cap contractors amid current booming infrastructure works.

• Despite the earnings cut, we still maintain our positive view on the Group as bored pilling and fundamental works still remain vibrant. We believe the Group will resume its growth trajectory in FY17 given more construction works in the pipeline, especially under government’s initiative such as ETP, TOD (Transit-Oriented Development) and the Corridor and City Transformation Programmes that would render job opportunities to Ikhmas Jaya.

Source: JF Apex Securities Research - 23 Nov 2016