Result

• Ikhmas Jaya slid to a net loss of RM1.8m for its 1QFY17, as compared to a net profit of RM1.5m in last quarter and RM4.3m in the preceding year quarter. The lackluster performance was mainly attributed to spill over effect of projects deferment. As a result, cost of sales catapulted in view of the delay in finalisation account of some of the completed projects.

• Below expectation. Hence, 3MFY17 recorded net los of RM1.8m as compared to our full year net earnings forecast of RM 30m in FY17.

Comment

• Revenue in 1QFY17 decreased 7.2% qoq but improved 42.1% yoy. The Group recorded RM72.6m revenue in 1QFY17 as compared to RM 78.2m in last quarter and RM51.1m in the preceding year quarter. The unfavourable revenue recognised in 1QFY17 on quarterly basis was mainly due to lower contribution from a bore piling project as a result of project delay and multi handover of working sites. Meanwhile, lower revenue recognition also affected by lower recognition in new commencement projects. On the flip side, the jump in revenue on yearly basis was in tandem with the orderbook secured by the Group.

• Spill over effect in project deferment resulted in the delay of finalisation account for some of the completed projects within 1QFY17. The Group experienced elevated cost of sales that were not in tandem with the revenue recognised. We learnt that there were earnings from variation orders (VO) amounted to c.RM5m failed to be captured in this quarter which would buoy the Group’s bottom line to RM3m. Thus, we opine that the Group earnings will pick up in next quarter in view of higher progress billings and the recognition of the VO.

• The Group has successfully replenished its orderbok of RM144.3m year to date, which accounted for 36.1% of our RM 400m estimated target orderbook for FY17. As such, the current outstanding order book stands at RM612m, which translates into 2x FY15’s earnings given a margin of 8%. Besides that, we believe the Group is able to secure more jobs ahead and further replenish its order book.

Earnings Outlook/ Revision

• We retain our earnings forecast for FY17 and FY18 as we believe earnings to pick up substantially in 2QFY17 onwards after finalizing the earnings in variation order (VO).

• 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, 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 Jun 2017