· Diversified business. One might identify JAKS as a water supply infrastructure contractor. However, JAKS is a little more than that as it is also well-diversified in several business segments, i.e. property development, construction, manufacturing and trading of steel pipes, and local property investment. That said, the group is on the lookout out for more diversification opportunities on the international front, which led them to participate in a power generation business in Vietnam whereby construction works is expected to take off earliest by next year. Currently, earnings are still driven by property development and construction divisions, which make up 98% of its total operating profit of RM23.2m in 1H15.

· Construction, the earnings catalyst. To date, JAKS has managed to build up a massive orderbook of RM2.5b of which RM632m are local jobs while the remaining RM1.9b are from non-technical works for its Vietnam power plant project that will provide 3-4 years earnings visibility for the group. On top of that, the group is currently tendering for more projects, such as the Pan Borneo Highway, sewerage treatment plants, and more building jobs bringing its tender book up to RM3.5b, with a replenishment target of c.RM600m per annum. Moving into FY16, we expect its property earnings contribution to taper off to only 13% vs. 49% in FY15E as we are expecting an exponential contribution from its construction division as they begin construction works for its Vietnam project, which is front-end loaded.

· Vietnam IPP. Management’s venture into the IPP in Vietnam suffered a few false starts previously. However, this time around, management is able to secure a strong joint venture partner, namely CPECC group under China Energy Engineering Group Co. Ltd. (CEEC) which has a strong track record in power projects in China and internationally, to execute the 25-years BOT 2x600mw coal fired thermal power plant project in Hai Duong Province Vietnam. We are long-term positive on the project as the JV has secured a 25-year Coal Supply Agreement (CSA) with National Coal-Mineral Industries Group and 25-year Power Purchase Agreement (PPA) with Vietnam Electricity. Furthermore, we reckon that the project will yield an attractive IRR of 14.8% over the period of its concession. Based on JAKS’ 30% stake in the JV, it would easily translate to RM0.72/share to its valuation.

· Monetisation of Evolve Concept Mall? In addressing its high net gearing of 1.26x as of 2Q15, management indicated that they are exploring the option in disposing its 51%-owned mall in Ara Damansara with a total NLA of 460,000sf. It would be positive if they managed to monetise the mall as it would easily bring down its net gearing of 1.26x to 0.40x. · Inspiring earning growth. Assuming that it’s Vietnam non-technical works kick off in 1Q16 coupled with an annual orderbook replenishment assumption of RM600m locally, we are projecting FY15E/FY16E/17E net profits of RM19.3m/RM94.2m/RM120.7m with earnings growth rates of 387%/28%/2%.

· Trading Buy. Given its diversified interests, we are valuing JAKS at RM1.53 based on a 25% discount to its Sum-of-Parts value of RM2.04 (refer overleaf for more details). We deem that our applied discount of 25% is fair as it is in-line with the SOP discount range of 20%-30% applied to developer-cum-contractors under our coverage. We are calling a Trading Buy on JAKS as our Fair Value implies potential 34% upside to the stock, and we like the stock for its impressive earnings growth in the next 2-3 years underpinned by its strong outstanding orderbook of RM2.5b coupled with its diversification into the power industry which will provide a strong recurring income to the group in the future. At our Fair Value of RM1.53, it implies FY16-17E PER of 7.1x-5.5x

Source: Kenanga Research - 6 Oct 2015