This article first appeared in The Edge Financial Daily on June 5, 2018
Ikhmas Jaya Group Bhd
(June 4, 27 sen)
Maintain buy with a lower target price of 33 sen: Ikhmas Jaya Group Bhd reported a lower revenue of 29.2% on a quarter-on-quarter (q-o-q) basis mainly due to unanticipated slowdown in construction activities amid shorter working days in relation to long festive season (Chinese New Year). However, the group posted a higher profit before tax of RM7 million from a loss of RM6.6 million, thanks to lower cost of construction during the quarter and impairment of construction work in progress of completed projects, receivables, and project deposits incurred in its fourth quarter of financial year 2017 (4QFY17) ended Dec 31, 2017.
Compared with 1QFY17, the group recorded an increase in revenue and net profit of 15.3% for 1QFY18 mainly due to higher construction works done. In addition, the delay in finalising the accounts of some completed projects in 1QFY17 also contributed to the better y-o-y performance. We may see a strong comeback for the group in FY18 since it was able to generate a higher profit margin of 6.2% in 1QFY18 compared with 2.3% in FY17.
The group has successfully secured order book of RM399.4 million year to date, which accounts for 79.8% of our RM500 million target order book for FY18. As such, we believe the current outstanding order book stood at approximately RM940 million as at 1QFY18.
Moving forward, we believe that the group is able to generate a better margin of 6% to 8% especially securing more contracts for design and construction of bridges and piling works. The anticipated slowdown in construction sector post-GE14 may not pose a serious issue for the group as its earnings visibility in the coming years remains upbeat underpinned by a strong order book, keeping it busy for the next two to three years.
We slash our earnings forecasts for FY18 and FY19 by 28.6% and 31.2% to RM20 million and RM26.4 million, respectively, as we foresee a lower-than-expected profit margin due to higher cost of construction. Still, we expect the group to return to the black in its FY18 and further strengthen in FY19. We maintain “buy” with a lower TP of 33 sen (previously 55 sen) after earnings downgrade and applying lower target price-earning ratio (PER) in view of current cautious sentiment on the construction sector. Our target price is now pegged at PER of 8.9 times FY18 earnings per share, which is at its mean PER. — JF Apex Securities, June 1