Result

• Ikhmas Jaya reported a net profit of RM2.1m for its 4QFY17. The quarterly net profit declined -81.6% QoQ but increased +35.7% YoY.

• For 12MFY17, the Group achieved a topline and bottomlne of +23.5% and +32.9% respectively.

• Meeting market but above our expectation. The Group recorded 12MFY17 net profit of RM14.5m, reaching 124% and 98% of our full year net profit estimates and consensus respectively. The high-than-expected net earnings was due to exceptional disposal gain pursuant to replacement cycle of machineries and interest income during 3QFY17.

Comment

• Lower earnings QoQ. The Group reported a higher revenue in 4QFY17, surging +89.1% QoQ and +46.4% YoY to RM114.5, thanks to the continuous construction activities in the 2 major key projects, along with the acceleration phase of bridge KL city projects. In spite of that, the Group recorded a lower net earnings, -81.6% in 4QFY18 (RM2.1m) as compared to 3QFY18 (RM11.3m) due to disposal gain of machineries of RM6m in previous quarter.

• Besides, the Group’s operating profit margin lowered by -22.8ppts QoQ mainly due rising cost of construction. However, the Group managed to attain a higher PAT of RM1.7m due to lower tax expenses.

• Stronger earnings YoY. As compared to 3QFY16, the Group recorded lower operating profit of -15.2% QoQ due to the rising cost of construction. However, the Group managed to attain a higher PAT of +83.7%, again, due lower tax expenses.

• Higher earnings for 12MFY17. The higher construction activities, particularly in 4 major key projects moving into acceleration phase during the 2HFY17 was the main factor contributed to higher revenue of +23.5%. However, the lower PBT growth of +17.5% mainly due to rising cost of construction, unavoidable delays in finalization of completed projects and additional cost incurred on one of the infrastructure projects during 2QFY17.

• The Group has successfully replenished its orderbook of RM40m year to date, which accounts for 8.0% of our RM500m target orderbook for FY18F. As such, we believe the current outstanding order book stands at RM631m, translating into 3.3x FY17’s earnings given a margin of 7.4%.

• Moving forward, we believe the Group is able to secure more jobs and further strengthen its existing order book over the next 2 to 3 years with the announcement of Budget 2018 earlier.

Earnings Outlook/ Revision

• We slash our earnings forecast for FY18F by 8.5% to RM28m from RM33m as we foresee a higher cost of construction causes lower margins. We also introduce our FY19F of RM38.4m. Still, our net profit for FY18F and FY19F represent commendable YoY growth of +48.9% and +27.0% respectively.

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

Valuation/Recommendation

• Downgrade to HOLD from BUY with lower target price of RM0.55 (previously RM0.75) after earnings downgrade and applying lower target PER in view of current cautious sentiment on small cap counters. Our target price is now pegged at 10.3x FY18F PE (+1.0 SD) based on EPS of 53 sen.

Source: JF Apex Securities Research - 1 Mar 2018