Result

• Ikhmas Jaya registered a net profit of RM1.5m for its 4QFY16, which increased 5.7x times qoq but down 32.7% yoy. Cumulatively, the group posted net profit of RM11.3m for 12MFY16, plunging 55.2% yoy. The unappealing performance was mainly attributed to deferment in 2 projects due to the delay in site handover and higher administration and deprecation cost incurred in FY16.

• Below expectation. Hence, 12MFY16 net profit of RM11.3m only accounted for 83.5% of our full year earnings forecast of RM13.51m.

Comment

• Revenue jumped in 4QFY16 but ebbed by lower gross profit margin. The improvement in revenue with 54% qoq growth was due to pick up in progress of projects. However, lower gross profit of 15.8% (-5.8 pts qoq, -4.6pts yoy) eroded the earnings, which resulted in a net profit of RM1.5m, -32.7% yoy. We believe the lower gross profit margin recorded was due to additional materials and manpower incurred in view of deferment of certain projects with counter party’s request to speed up the project.

• FY16 earnings (-55.2%yoy) bogged down by lower revenue and higher administration and depreciation cost. The slide in 12MFY16’s revenue to RM242.6m from RM268.7m was due to completion of a building construction project and 2 piling projects in 12MFY15 as compared to pro-longed hindrance for certain projects in 12MFY16. Furthermore, 12MFY16’s net profit was fazed by higher administration (+16.5% yoy) and depreciation (+29.2% yoy) costs. As such, 12MFY16’s net profit margin undermined 4.71 pts to 4.65%.

• Looking forward, we opine that the group will ameliorate from current doldrums and see strong growth in FY17. We believe the earnings to pick up strongly in FY17 given the scant progress billings in FY16 to regain its strength and recover in FY17 especially the previously delayed projects which have finally seen some advancement.

• Meanwhile, the Group’s clear earnings visibility is anchored by current outstanding order book of RM540m, which translates into 1.73x FY15’s earnings given a margin of 8%. 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 retain our earnings forecast for FY17 and introduce our earnings forecast for FY18 of RM30.6m.

• Risk in our earnings forecast will be the execution of projects which might be affected by unforeseen hindrance in projects delivery.

Valuation/Recommendation

• Maintain BUY with an unchanged target price of RM0.76. We derived our valuation by pegging at 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.

• We 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 - 1 Mar 2017