Following a productive discussion with Ibraco management, we are optimistic about the group's future earnings prospects. Key takeaways from the meeting include: 1) FY23 sales figure would have been higher, 2) FY24 sales target of RM400mn is conservative, 3) remain active in bidding despite having a record construction orderbook and 4) building material division to complement its core property and construction division. With solid unbilled sales of RM244.8mn, a promising future GDV of RM5.6bn and a record outstanding construction orderbook of RM1.2bn, we forecast Ibraco's net earnings to expand at a 5-year CAGR of 24.2% to RM69.5mn in FY26f. We maintain our Buy recommendation on Ibraco with a higher TP of RM1.18/share, based on SOP valuation.

FY23 Sales Figures Would Have Been Higher

During our recent meeting, management highlighted a robust recovery in buyer sentiment within the Sarawak property market. This is evidenced by the group’s new property sales achieved in 2023, which surged by 83% YoY to RM385mn, a record for the group – see Figure 1. In addition to steady sales from ongoing projects, this significant achievement was also driven by encouraging take-up rates for newly launched projects, with RM626mn worth of new projects introduced in 2023 alone – see Figure 2. Northbank Kuching remained the primary contributor to FY23 sales, accounting for 66% of the total sales.

That said, FY23 new sales of RM385mn made up approximately 96% of both the management's FY23 sales target and our sales assumption of RM400mn. We believe FY23 would have seen even higher figures if not for the delay of two projects, namely, NewUrban Residence PJ South (GDV: RM400mn) and Arden City, Kota Samarahan (GDV: RM420mn), which were postponed to 1H24 from their initial planned launch date in 4Q23.

FY24 Sales Target of RM400mn Is Conservative

For FY24, management is setting its sights on achieving new sales of RM400mn, bolstered by planned launches worth RM1.6bn. However, given the robust demand for properties and the substantial pipeline of new launches, we view this sales target as rather conservative. With Ibraco unveiling two highly anticipated projects in diverse locations—Arden City in Kota Samarahan and NewUrban Residence at PJ South—we anticipate a significant boost in sales, positioned to exceed management’s sales target.

We are particularly excited about the launch of Arden City due to its strategic location in Kota Samarahan, which is emerging as an educational and medical hub endorsed by the Sarawak government. Arden City presents a prime investment opportunity with universities, research centres, and medical facilities in close proximity and plans for the Autonomous Rapid Transit (ART) system to alleviate traffic congestion. Spanning 76.3 acres, it integrates commercial, office, residential, healthcare, and leisure spaces. The first phase, The Atrium, comprising 39 shop lots with direct access to the Sarawak Cancer Centre, has already achieved an encouraging 50% take-up rate since its January launch. Furthermore, the launch of Aster Court, the first serviced apartment within Arden City, scheduled for 2Q24, is expected to add to its appeal as a vibrant and integrated community.

In Peninsular Malaysia, Ibraco recently launched NewUrban Residence in PJ South, near Bandar Sunway, earlier this month. With an average selling price of RM620psf compared to neighbouring completed projects with asking prices ranging from RM550 to RM650psf, we gather that the reception has been positive. However, management stated that it is too early to provide the takeup rate figure as buyers are currently in the process of applying for loans.

Upon closer examination of the planned launches totalling RM1.6bn for 2024, we anticipate that the actual launch from the Business Park within NorthBank, Kuching, may be lower than the proposed RM729mn. This is due to the extensive development scope, which includes a Retail Mall, SoHo tower, offices, a Hotel, and three blocks of serviced apartments. It is unlikely that all these components will be launched simultaneously in 2024. Excluding the Business Park from the 2024 launches and assuming a conservative take-up rate of just 50% for the remaining new launches worth approximately RM900mn, we believe Ibraco should still be able to achieve at least RM450mn in new sales this year.

Remain Active in Bidding Despite Having a Record Orderbook

In 2023, Ibraco's construction division saw significant activity, with the company securing notable contracts. In July, it was awarded a RM530mn contract for a portion of the second trunk road in Samarahan Division. Subsequently, in November, Ibraco, along with partners China Railway Engineering Corporation Malaysia and Nanyang Tunnel Engineering Sdn Bhd (with Ibraco holding a 51% stake in the consortium), secured the Kuching Urban Transportation System (KUTS) infrastructure works for the Blue Line, totalling RM568.6mn. The Blue Line track of the ART route, connecting Kota Samarahan to Kuching, will feature key stops, including Ibraco’s upcoming township of Arden City and The NorthBank. These achievements significantly boosted Ibraco's outstanding construction order book to RM1.2bn, marking a substantial increase from RM638mn at the end of FY22. This robust pipeline of projects ensures a positive earnings outlook for Ibraco's construction division until FY26.

Despite the record order book, Ibraco remains committed to an active bidding strategy. The company aggressively pursues various building and infrastructure projects from both the public and private sectors, accumulating a tender book worth RM250mn. Ibraco’s successful completion of projects such as the RM303mn Mukah Airport project in 2021, the RM45mn Sarawak water supply grid in the Lawas District in Jan-24, and the temporary facility and building works for the Sarawak methanol project in Bintulu in Feb-24, demonstrates the group’s competency in handling public construction projects.

With its track record across a wide range of infrastructure projects, Ibraco is favourably positioned as Sarawak embarks on massive infrastructure spending to achieve its goal of becoming a developed state by 2030. The potential for new projects in Sarawak is abundant and considering Ibraco’s capabilities, we expect the group to participate in tenders for: 1) airport expansion works in Sibu, Miri, and Kuching, a proposed new airport in Lawas, 2) water supply grid programs, 3) the 30km KUTS Green Line connecting Pending and Damai, and 4) green hydrogen production plants and supporting facilities.

Importantly, even with this record order book, Ibraco’s construction division has the capacity to manage an additional RM1bn worth of new contracts. This indicates that the group has sufficient resources to undertake new projects for the next five years without incurring additional capital expenditures to expand the construction division, assuming a conservative annual job replenishment of RM200mn.

Building Material Division to Complement Its Core Property and Construction Division

Ibraco has diversified its business interests beyond its core property and construction divisions. In late 2022, the group entered the ready-mix concrete manufacturing sector, marking its third new business venture following earlier diversifications into the quarry business in 2019 and steel pipe manufacturing in 2022.

To facilitate its entry into the ready-mixed concrete sector, Ibraco established a joint venture with Kamunting Premix Plant Sdn Bhd, a supplier of asphalt concrete and ready-mixed concrete. This joint venture, in which Ibraco holds a 70% stake, is responsible for the production and sale of ready-mix concrete. This strategic move enables the group to expand into new business segments while ensuring a consistent supply of high-quality ready-mix concrete for construction sites, including those within the Ibraco group's development projects. The manufacturing facility began operations in Sep-23, with a monthly production capacity of 10,000 metric tonnes.

As for the steel pipe manufacturing business, Ibraco invested RM35.0mn in a steel plant situated on a 10.23-acre parcel of land in Muara Tebas, Kuching, acquired for RM7.2mn. The steel facility is projected to have an annual production capacity of 30,000 tonnes and is scheduled to commence trial production in the first quarter of 2024. The end products, mild steel cement lined (MSCL) pipes, will be marketed for both external sales and internal consumption. Management anticipates solid demand for steel pipes as the Sarawak state government aims to achieve 100% water supply coverage throughout the state by 2030. Currently, water supply coverage in Sarawak stands at 85.4%, with rural coverage at 70.5%. With only two local manufacturers in the market, namely KKB Engineering and Weida, Ibraco is positioned to capitalize on the growing demand for MSCL pipes.

For the group’s quarry division, the first quarry site began operations in July 2020, while the second site is slated to commence operations in 2024 (refer to Figure 5 for details on the quarry sites). The quarry business has become a new revenue stream, contributing RM25mn to the group’s revenue in 2023 (about 6% of total revenue). Management envisions the building material division as a complementary component to the existing property and construction divisions, progressively becoming a new growth pillar for the group.

Forecast

We take this opportunity to revise our FY24/25/26 new sales assumptions upward to RM450mn /RM500mn /RM500mn from RM400mn /RM425mn /RM450mn previously and adjust our progress billings and margin assumptions for the newly launched projects. Correspondingly, our FY24/25/26 are revised higher by 1%/3%/10%, respectively. We forecast the group’s net earnings to expand at a 5-year CAGR of 24.2% to RM69.5mn in FY26f. The group’s future earnings are expected to be anchored by unbilled sales of RM244.8mn, a promising future GDV of RM5.6bn and a record outstanding construction orderbook of RM1.2bn.

Valuation

Following the earnings revision, our SOP-derived TP was adjusted to RM1.18/share (previously RM1.16/share). Property development and management are valued at 9x CY25 earnings, while construction is valued at 12x. Although our target valuations for Ibraco's property and construction exceed those of its small-cap peers in the respective sectors, we believe it is justified. This is attributed to Ibraco's entrenched position in Sarawak, which has enabled it to garner strong property sales and secure construction projects with aboveaverage profit margins. Meanwhile, the quarry and other divisions are valued at 10x CY25 earnings. We maintain our Buy recommendation for the stock.

Source: TA Research - 20 Mar 2024