Result

• Ikhmas Jaya reported a net profit of RM1.2m for its 2QFY18 as compared to a net loss of RM5.2m in 1QFY18 and RM2.8m in 2QFY17. Meanwhile, the Group reported a quarterly revenue of RM65.0m, dropped 22.3% QoQ whilst increased 25.2% YoY.

• For 6MFY18, the Group achieved topline and bottomline of +19.4% and +576.6% respectively.

• Below our and market expectation. The Group’s 6MFY18 results account for 32/32.5% of our/consensus estimates. The weaker-than-expected earnings were due to lower-than-expected profit margin.

Comment

• Lower earnings QoQ due to lower revenue coupled with higher cost of sales. The lower revenue was mainly due to unanticipated slow-down in construction activities during the current quarter. Besides, a lower PBT/PBT margin of -76.9%/-5.9ppts, mainly due to increase in cost of sales.

• Weaker earnings YoY resulting from increasing in cost which offset higher revenue. As compared to 2QFY17, higher revenue is recorded thanks to increase in construction activities in current quarter. However, the disappointing Gross profit margin was mainly due to increasing costs in fuel, transportation and rise in finance charges.

• Stronger earning 6MFY18, thanks to better revenue in tandem with lower cost of sales. The higher PBT of 192.9 %(from 2.9m/6MFY17 to 8.6m/6MFY18) mainly due to increase in construction work done of some key projects, along with delay in finalising the account of some completed projects during the 1HFY17.

• The Group has successfully secured orderbook of RM477.4m year-to-date, which accounts for 95.48% of our RM500m target orderbook for FY18F. As such, we believe the current outstanding order book stands approximately RM940m as at 2QFY18, which provide good prospects of earnings visibility for 2HFY18.

• Expected to have a better margin in 2HFY18. Moving forward, we believe that the Group is able to generate better margin due to lower finance cost as a result of reduced loan and borrowings in 2QFY18. Moreover, construction cost could also be reduced with the zero-rated GST in 3QFY18, and SST exemption from 4QFY18 onwards on building material such as cement, sand and iron.
   
• Key risks: 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 maintain our earnings forecast for FY18F and FY19F as believe that the Group is able to achieve a better profit margin due to the reason as mentioned above.

Valuation/Recommendation

• Maintain BUY with an unchanged target price of RM0.33, which is based on PE of 8.9x FY18F EPS, which is at its mean PE. We still favour the Group for its strong orderbook, along with its limited downside risk.

Source: JF Apex Securities Research - 3 Sept 2018