Result

• Ikhmas Jaya reported a net profit of RM5.2m for its 1QFY18 as compared to a net loss of RM5.3m in 4QFY17 and RM1.8m in 1QFY17. Meanwhile, the Group reported a quarterly revenue of RM83.7m, dropped 29.2% qoq whilst increased 15.3% yoy.

• Below ours but within market expectation. The Group’s 3MFY18 results account for 18.6%/22.3% of our/consensus estimates. The weaker-than-expected earnings were due to lower-than-expected profit margin.

Comment

• Higher earnings qoq. The group reported a lower revenue of 29.2% mainly due to unanticipated slowdown in construction activities amid shorter working days in relation to long festive season (Chinese New Year). However, the Group posted a higher PBT of RM7m from a loss of RM6.6m, thanks to lower cost of construction during the quarter and impairment of construction work-in-progress of completed projects, receivables, and project deposits incurred in 4QFY17.

• Stronger earnings yoy. As compared to 1QFY17, the Group recorded an increase in revenue and net profit of 15.3% mainly due to higher construction works done. In addition, the delay in finalising the account of some completed project in 1QFY17 also contributed to the better yoy performance. We may see a strong comeback for the Group in FY18F since it able to generate a higher profit margin of 6.2% in 1QFY18 as compared to 2.3% in FY17.

• The Group has successfully secured orderbook of RM399.4m year-to-date, which accounts for 79.8% of our RM500m target orderbook for FY18F. As such, we believe the current outstanding order book stands approximately RM940m as at 1QFY18.

• Margin recovery in FY18. Moving forward, we believe that the Group is able to generate better margin of 6% to 8% especially securing more contracts for design and construction of bridges and pilling works.

• Strong orderbook of c.RM940m. The anticipated slowdown in construction sector post GE14 might not pose a serious issue for the Group as its earnings visibility in the coming years remains upbeat underpinned by strong orderbook, keeping it busy for the next 2 to 3 years.

• Major risks to our earnings forecast include: a) unforeseen delay in execution of project, b) lower-than-expected projected profit margin, and c) unexpected credit risk due to sizeable account receivable.

Earnings Outlook/ Revision

• We slash our earnings forecast for FY18F/FY19F by 28.6%/31.2% to RM20m/RM26.4 as we foresee a lower-than-expected profit margin due to higher cost of construction. Still, we expect the group’s FY18F net profit to return into the black for its FY18F and further strengthening in FY19F.

Valuation/Recommendation

• Maintain BUY with a lower target price of RM0.33 (previously RM0.55) after earnings downgrade and applying lower target PER in view of current cautious sentiment on construction sector. Our target price is now pegged at PE of 8.9x FY18F EPS, which is at its mean PE.

Source: JF Apex Securities Research - 1 Jun 2018