This year of 2017 has been a busy time for Ibraco, securing one airport construction project and 4 parcels of land in Petaling Jaya. Last week, it announced that it has teamed up with Help Education S/B to jointly provide education service in its new township “Northbank”in Kuching. While we are positive on the group’s new business venture, we believe that the financial impacts will only be more visible in 2020 and beyond. No change to our earnings forecasts and TP of RM0.94/share, based on 9x CY18 EPS. Reiterate Hold.

Looking back at what has been achieved so far this year, there are many highlights.

Growing Its Presence in the Klang Valley

In February, Ibraco unveiled its first property development outside Sarawak, namely The Continew (GDV: RM415mn) in Kuala Lumpur, a mixed development featuring 4 units of 3-storey commercial shop/retail, 30 units of retail/office space and 510 units of service apartment. Priced at RM900psf, we note it is attractive as compared to surrounding projects that are generally priced at RM1,000 psf onwards. In terms of take up rate, we gather that it is now 49% sold.

In Sept, Ibraco Bhd has proposed to buy four parcels of vacant leasehold land in Petaling Jaya, Selangor for RM37.4mn (or RM220psf), in a move to further build up its presence in the Klang Valley. Measuring a total of 15,811.16 sq m, the land is strategically located along the New Pantai Expressway. Assuming an efficiency ratio of 75% and average selling price of RM600-700psf, the land, which comes with a plot ratio of 4.0 times, could potentially generate a GDV of RM306mn – RM357mn. This is expected to boost the group’s outstanding GDV by ~5% to about RM6.0bn.

Mukah Airport Construction Job to Diversify Earnings

On the construction front, the group has secured contract to build new airport in Mukah, Sarawak for RM302.6mn in July. Note that the airport job is only the second public construction contract Ibraco has won since the construction unit was set up in 2002. Nevertheless, we believe Ibraco is capable of handling the project, given its construction unit has a proven track record of carrying out earthwork, civil, building and structural works for residential, commercial and industrial projects.

We gather that the construction work has commenced in August and it is expected to be completed within 36 months from the date of commencement. According to management, the group will start recognising revenue from this contract in 4Q17, in the region of 10% to 15% of the project sum (RM30mn-45mn). Going forward, the group will continue to actively bid for construction and infrastructure projects offer by the Governments as well as the private sector companies. Overall, we are positive on the group’s diversification strategy to further grow its construction division which has only been focusing on the group’s in house development in the past.

Venturing Into Education Business

Besides construction and property development, it has recently ventured into another new segment - providing education services. Last week, the group announced that it has teamed up with HELP Education Services Sdn Bhd (HELP) to offer education at the primary, secondary and pre-university levels. For a start, we understand that the group will allocate approximately RM55mn-60mn for this new business segment over a development period of two years. We believe that this would diversify the group’s source of income as well as enhancing the value of its upcoming launches within Northbank. Tap on HELP’s established operating track record of providing academic programmes in social sciences, particularly in business, economics, law and psychology, Ibraco aspires to bring quality education for the residents of its upcoming flagship township.

Looking Ahead

The group is busy preparing for the office launch of Ibraco’s next major integrated development “Northbank” in Kuching, which entails a business park as well as guarded residential and commercial buildings. Scheduled for launch in Nov-17, the maiden phase is expected to have an estimated GDV of RM220mn. In conjunction with the upcoming launch of Northbank, Ibraco is also working actively with HELP, to set up an education centre in the development. The centre is expected to begin operating in FY2019. In addition, preparations are well under way for the proposed construction the group’s new corporate office tower in Northbank. Back in Peninsular Malaysia, the group will also looking to apply for variation/new development order for the new land in Petaling Jaya in due course.

Limited Debt Headroom For Future Growth

Ibraco prefers to keep its gearing ratio below 50%. Based on the group’s net debt level of RM137mn or net gearing ratio of 0.4x as at Jun-17, the new land acquisition and the estimated capex for the education business would increase Ibraco’s net gearing to approximately 0.6x, assuming a 70/30 debt-equity ratio. We believe a strong capital position supports Ibraco’s future development and expansion plans as it embarked on its next phase of growth. In view of heavy capital requirement, we do not discount the possibility of raising fresh equity to strengthen its balance sheet.

Forecasts

To recap, 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. As the pipeline launches are largely within our projections, we make no change to our FY17-19 earnings estimates. Unbilled sales of RM291mn should sustain the group’s earnings for about 2 years. Our FY17/18/19 sales assumptions are RM356mn/RM440mn/RM550mn respectively.

Valuation

While we are positive on the group’s new business venture, we believe that the financial impacts will only be more visible in 2020 and beyond. We maintain Ibraco’s target price at RM0.94/share, which is based on 9x CY18 EPS. This is in line with our target P/E for the small cap developers under our coverage. Reiterate Hold as we believe that Ibraco is currently fairly valued and has priced in the better prospects ahead.

Source: TA Research - 9 Oct 2017