Result

• Ikhmas Jaya reported a net loss of RM29.4m for its 4QFY18, widening from a net loss of RM4.0m in 3QFY18 and a net profit of RM2.1m in 4QFY17. Meanwhile, the Group reported quarterly revenue of RM71.5m, increased 6.6% QoQ but decreased 37.6% YoY.
• For 12MFY18, the Group reported a net loss of RM29.4m against a net profit of RM14.3m in 12MFY17. Meanwhile, revenue dropped by 4.1% YoY from RM299.5m to RM287.2m.
• Below ours and market expectation. The Group’s 12MFY18 results significantly fell below our/market full year FY18F net profit of RM7.3m/RM9.6m respectively. The discouraging performance was mainly due to higher impairment charges of RM34m on contract assets and trade receivables.

Comment

• Widening QoQ net loss as a result of higher operating loss. Higher revenue was offset by higher cost of sales (ie. Impairment charges on contract assets of RM36.3m in 4QFY18 vs. RM10.2m in 3QFY18) coupled with higher operating and finance expenses.

• YoY loss no thanks to lower topline and negative margin. A lower revenue of 37.6% was dragged by decrease in construction activities. Negative EBIT/EBIT margin of RM31m/43.4% as a result of higher impairment charges of RM35.1m on contract assets and trade receivables.

• Again, net loss in 12MFY18 affected by lower revenue as well as unpleasant margin. Decrease in construction activities (ie. bridge project in Melaka and mall project in Kuala Terengganu) was the main reason for the fall in revenue. A loss before tax/loss before tax margin of RM34.4m/12% recorded because of higher impairment charges and finance cost.

• Currently, the Group has secured orderbook of RM488.6m in FY18, which accounts for 97.7% of our RM500m target orderbook for FY18F. As such, current outstanding order book stands approximately RM766.7m as at 4QFY18, which provides earnings visibility of at least for the next 2 years as mentioned by the Group.

• More impairment loss ahead? We expect slightly lower provision of impairment loss will be charged on trade receivables in coming quarter as compared to 4QFY18. This was due to its high trade receivable of RM311m in 4QFY18

vs. RM380m in 3QFY18. Overall, FY19F will still be negatively impacted by these sizeable impairment charges.

• Greater emphasis and focus on major infrastructure projects. Moving forward, better margin will be achieved only if the Group is able to undertake construction projects for the design and build of bridges and road networks, pilling and basement as well as flood mitigation work.

• Key risks are: a) unforeseen delay in execution of project, b) lower-than-expected profit margin in view of higher input cost, and c) unexpected credit risk due to sizeable account receivable.

Earnings Outlook/ Revision

• We slash our FY19F from a net profit of RM11.1m to a net loss of RM3.6m as we account for negative margin due to higher impairment charges on trade receivables. Meanwhile, we also introduce our FY20F net earnings of RM5.2m.

Valuation/Recommendation

• Downgrade to SELL from HOLD with a lower target price of RM0.08 (previous target price of RM0.11) following our earnings cut. We also rollover our valuation to FY20F. As such, our revised target price is now based on PE multiple of 7.9x FY20F EPS, which is -0.5 SD below its mean PE.

Source: JF Apex Securities Research - 1 Mar 2019