Review

• Ibraco’s 9M17 net profit of RM9.6mn came in within ours but below consensus’ expectations. It accounted for 60% and 42% of ours and consensus’ full-year earnings forecasts respectively. We expect 4Q17 to come in substantially stronger, underpinned by: 1) maiden progress billings recognition from Continew, KL, following the completion of foundation works in Oct-17; and 2) full quarter of revenue recognition of Mukah Airport construction contract which commenced work in mid-Aug.

• Ibraco posted net profit of RM9.6mn in 9M17, a decline of 60% from RM23.8mn 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 7.9%-point YoY to 22.3%, due to: 1) less favourable product mix, and 2) higher administrative, selling and marketing expenses. (+20.4% YoY).

• Sequentially, the group’s 3Q17 revenue increased 26% to RM28.2mn. However, net profit grew at a slower pace of 6% QoQ RM3.2mn. This was largely due to higher administrative expenses (+19% QoQ) and finance costs (+4% QoQ), as well as effective tax rate of 25.5% (vs. 23.8% in 2Q17).

Impact

• No change to our earnings estimates.

Outlook

• Ibraco recorded RM54mn new sales in 3Q17, bringing the 9M17 sales to RM282.6mn. This came in within our FY17 sales assumptions of RM356mn and tracked management’s sales target of RM350mn. Unbilled sales as at Sep- 17 declined to RM206.4mn, from RM291mn a quarter ago. This provides the group with slightly more than one year’ earnings visibility (1.3x FY16 property revenue). Meanwhile, outstanding construction order book of RM292mn should support the group earnings over the next three years.

• Looking ahead, the group is busy preparing for the official 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 1Q18, 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.

• Other than that, the group has completed the pilling works of the proposed construction the group’s new corporate office complex in Northbank, which comprises two office blocks, namely a 6-storey corporate office block and an 8-storey strata-titled corporate office block. In a separate announcement, Ibraco announced that it will sell the 8-storey strata-tiled corporate office block to related parties for RM25.5mn. We are positive on this sale as the progressive payments from the sale consideration will help to part finance the development costs of the Northbank office complex. Note that the proposed sale is subject to shareholders’ approval in an EGM to be held in 1Q18. The building is expected to complete by 2Q2020.

Valuation

• It has been a busy 2017 for Ibraco, having secured one airport construction project, and 4 parcels of land in Petaling Jaya. It has also 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. 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 share price has priced in the better prospects ahead.

Source: TA Research - 24 Nov 2017