Review

• Ibraco’s 1H18 net profit of RM7.4mn came in below expectations, accounting for 33% and 24% of ours and consensus’ full year forecasts respectively. The variance was largely due to: 1) slower-than-expected revenue recognition of Mukah Airport construction contract and certain property projects that are still in the early stage of development, and 2) weaker-than-expected property development margin.

• Ibraco’s 1H18 net profit grew 17% YoY to RM7.4mn, despite a strong revenue growth of 98% YoY. We attribute the slower growth in net profit to weaker margin (EBIT margin -5.2-pts YoY to 15.1%) following the change in sales mix with higher proportion of residential properties sales which have a lower margin compared to commercial properties. In tandem with the launch of new projects such as Continew KL and Northbank Kuching, the group also saw a 65% increase in administrative, selling and marketing expenses, which resulted in lower profit margin.

• Sequentially, the group’s 2Q18 revenue grew 52% to RM49.3mn while net profit more than doubled to RM5.1mn. Meanwhile, we believe the significant EBIT margin expansion of 8.6-pts QoQ to 18.5% was driven by higher sale of inventory.

Impact

• We cut our FY18 earnings by 11% but raise FY19 & 20 earnings by 5% and 3% respectively, after adjusting for revenue recognition of Mukah Airport construction contract and property development projects, as well as lowering FY18-20 blended margin lower by 1-2%-pts.

Outlook

• Ibraco recorded RM48mn new sales in 2Q18, bringing the 1HFY18 sales to RM148mn. This came in within our FY18 sales assumptions of RM330mn and tracked management’s sales target of RM350mn. Key contributor to 1H18 sales is Northbank in Kuching which saw 83% take up the 64 landed residential units available (GDV: RM63mn). Looking ahead, the group plans to roll out >RM200mn worth of properties to sustain sales growth.

• Future earnings is expected to be anchored by unbilled sales of RM267.8mn and outstanding construction orderbook of RM241.9mn.

Valuation

• Following the change in earnings, our target price is revised slightly to RM0.59 (previous RM0.58) based on unchanged average blended CY19 PE/PB ratio of 8x/0.7x. With a total return of 9.0%, we maintain Hold on Ibraco.

Source: TA Research - 27 Aug 2018