Result

• Ikhmas Jaya reported a net loss of RM4.0m for its 3QFY18 as compared to a net profit of RM1.2m in 2QFY18 and RM11.3m in 3QFY17. Meanwhile, the Group reported a quarterly revenue of RM67.1m, which increased 3.2% QoQ and 10.8% YoY.

• For 9MFY18, the Group achieved a topline of RM215.7m, +16.6%, whilst a bottomline of RM2.5m, -79.9%.

• Below our and market expectation. The Group’s 9MFY18 results account for 12.5%/15.4% of our/consensus estimates. The weaker-than-expected earnings were due to net loss in the current quarter as a result of slump in margin.

Comment

• Quarterly loss no thanks negative margin. On QoQ basis, the higher revenue was offset by higher cost of sales (ie. Impairment cost of RM5m pursuant to charges on contract assets) and higher operating expenses. Likewise, on YoY comparison, the higher revenue was recorded thanks to increase in construction activities. However, a disappointing gross profit/ gross profit margin of -60.5%/- 13.4ppts was reported mainly due to provision of impairment charge on contract assets and trade receivables of RM9.9m. Without taking the effect of the charges, the Group achieve PBT of RM2.4m in the current quarter.

• Weaker earnings 9MFY18. The lower PBT/PBT margin of -70.4%/-8.9ppts was due to impairment charges of RM5.0m and higher depreciation expenses, which offset higher revenue of 16.6%.

• The Group has secured orderbook of RM473.4m year-to-date, which accounts for 94.7% of our RM500m target orderbook for FY18F. As such, current outstanding order book stands approximately RM820m as at 3QFY18.

• More impairment ahead? Moving forward, there might be further provision of impairment charges on trade receivables, due to its high trade receivable in 3QFY18 (ie. RM380m) as compared to 3QFY17 (ie. RM397m).

• Key risks are: 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 tweak down our earnings forecast for FY18F and FY19F by 63.5% and 54.2% respectively following net loss in the current quarter as well as lower gross margin ahead due to anticipated higher cost of sales.

Valuation/Recommendation

• Downgrade to HOLD from BUY with a lower target price of RM0.15 (previous target price of RM0.33) following our earnings cut. We roll over our valuation to next financial year to peg at 7x (from 8.9x) FY19F EPS of 2.2sen. The lower target PE is due to sizeable trade receivable of the Group. Also, our target price implies 0.4x of its P/B.

Source: JF Apex Securities Research - 3 Dec 2018