Period     3Q13/9MFY13

Actual vs. Expectations    9MFY13 net profit of RM2.9m came in below our expectation and accounted for only 58% of our full-year estimate of RM6.9m. The group saw lower than expected margins due to the previous delays in its construction projects. 

Dividends    No dividend was declared during this quarter as expected.

Key Results Highlights     QoQ,  Fajar’s earnings improved tremendously by 114% from RM0.7m to RM1.6m on the back of revenue growth of 82% coupled with a lower effective tax rate of 1.3%. The higher revenue was due to its construction activities running on full swing i.e. LRT extension & depot works, Shaw Parade project. The low effective tax rate of  1.3% was due mainly to the utilisation of unabsorbed tax losses available.

YoY, the company registered a net profit of RM1.6m compared to a loss of RM3.9m, underpinned by its better construction activities, which contributed to an improvement in the operating margin to 3.9% as compared to the previous -15.9%. 

YTD, Fajar turned profitable with a net profit of RM2.9m as compared to a net loss of RM1.1m. We see further improvement in the operating margin by 2.8ppt from 0.4% to 3.2% on the back of a speedier execution of its outstanding order book of c.RM700m.

Outlook    Moving forward, management has guided that they are targeting for a c.RM700m orderbook replenishment at the end of 2013 or early 2014. Given the brighter prospect in the construction sector in anticipation of more jobs expected from the award of infrastructure projects  in the pipeline, we believe that its target replenishment  order book is achievable.

Change to Forecasts     Downgrade FY13E earnings by 29% from RM6.9m to RM4.9m taking into account of lower-than-expected margin assumption on its construction projects due to the previous delays. 

However, we raised our FY14 numbers marginally by 1.5% from RM19.6m to RM19.9m as we factored in a RM300m orderbook replenishment for FY14 on top of its remaining order book of c. RM700m.

Rating   Upgrade to OUTPERFORM

Valuation     Hence, we are raising our Target Price from RM0.51 to RM0.83 based on a higher 8.0x FY14 PER, (previously 5x FY14 PER). 

Despite earnings downgrade, we are upgrading Fajar from an UNDERPERFORM to an OUTPERFORM due to 1) the stock’s proxy to construction sector upcycle post 13 General Election which provide clear orderbook replenishment prospect, and 2) better earnings visibility amidst financial turnaround (especially in this quarter).

Risks    Delays in LRT works by the main contractors.

Escalating building material prices.

Source: Kenanga