Review

• Ibraco’s 1H17 net profit of RM6.4mn came in below expectations, accounting for only 24% and 21% of our and consensus’ full-year earnings forecasts respectively. The variance was largely due to weaker-than expected margins and progress billings.

• Ibraco posted net profit of RM6.4mn in 1H17, a decline of 67% from RM19.4mn a year ago. The drop in earnings was largely due to slow progress billing as its previous key contributing projects are nearing completion or have completed during the period under review. In addition, EBIT margin contracted 8.3%-point YoY to 23.0%, due to 1) less favourable product mix and 2) higher administrative expenses. (+13.2% YoY).

• QoQ, the group’s 2Q17 net profit fell 9.6% to RM3.0mn, despite a 17.2% growth in revenue. This was largely due to higher finance cost and effective tax rate of 23.8% (vs. -6.8% in 1Q17) as a result of higher deferred tax expense.

Impact

• Our FY17-19 earnings are revised lower by 6-38% to reflect the 3-month delay in official launch of Northbank and slower revenue recognition of its high-rise projects. We also trim our FY17-19 property development margin lower by ~5%-point. Nonetheless, our FY17/18/19 new property sales are largely unchanged at RM356mn/RM440mn/RM550mn respectively.

Outlook

• Ibraco recorded RM228.6mn new sales in 1H17. This came in within our FY17 sales assumptions of RM356mn and tracked management’s sales target of RM350mn. Continew, which is situated strategically along Jalan Tun Razak and Jalan Yew, was the key contributor to 1H17 sales, contributing 81% of the total 1H17 sales. The project, which generates a potential GDV of RM465mn, has recorded a satisfactory take up rate of 48% its official launch in Feb-17.

• The group’s unbilled sales as at June-17 is estimated at RM291mn, which provides the group with about 2 years’ earnings visibility (1.9x FY16 property revenue). In July, the group has secured contract to build new airport in Mukah, Sarawak for RM302.6mn. We gather that the construction work has commenced recently and it is expected to be completed within 36 months from the date of commencement.

• Looking forward, we expect new sales to be driven by Ibraco’s next major integrated development “Northbank” in Kuching, which entails a business park as well as guarded residential and commercial buildings. Originally scheduled for launch in 3Q17, it is now targeted for launch in Nov-17. We understand that the maiden phase is expected to have an estimated GDV of RM220mn.

Valuation

• Factoring in the earnings revision, we lower our target price to RM0.94/share from RM1.00/share previously, based on unchanged 9x CY18 EPS. With a total return of 9.9% we downgrade our recommendation to Hold from Buy previously.

Source: TA Research - 28 Aug 2017