This article first appeared in The Edge Financial Daily, on November 17, 2015.

Ikhmas Jaya Group Bhd
(Nov 16, 69 sen)
Initiate with a target price (TP) of 81 sen: We initiate coverage on Ikhmas Jaya Group with a TP of 81 sen, based on 13 times financial year ending Dec 31, 2016 forecast (FY16F) price-earnings ratio (PER). We reckon that its job flow in the near future will be strong as we understand that the group is in the midst of bagging some sizeable contracts of piling and building works worth about RM1 billion in the coming months.

This under-researched counter deserves a rerating given its competitiveness, and as a formidable participant in the marketplace that provides total multiskilled solutions with a competitive edge and versatility to secure projects. Ikhmas Jaya’s initial focus was in general civil engineering works, and over the course of 20 years, the group has expanded its expertise in covering pilings and foundations, bridges and buildings.

It is a niche player in piling works to benefit from the robust construction sector. Ikhmas Jaya is an established bore piling specialist with a track record of approximately 12 years. The group is able to propose lower costs for alternative design options to its customers, and without compromising quality and functionality. The ability to propose lower-cost solutions provides a competitive advantage for the group to win tenders for bore piling works.

The group has in-house technical professionals, including civil, structural and geotechnical engineers, who are involved in the technical design of piling and foundation works, as well as construction of bridges and buildings. With the involvement of design scopes, the group is also able to command better margins for the jobs secured, with strong fundamentals and clear earnings visibility anchored by its healthy order book.

Ikhmas Jaya has been enjoying robust earnings growth for the past few years, with a four-year compound annual growth rate of 37%. Looking forward, Ikhmas Jaya has an outstanding order book of RM264.1 million (as of July 31), coupled with a total tender book amounting to RM3.5 billion. Based on a historical success rate of 15% to 20%, we expect Ikhmas Jaya to bag RM630 million to RM840 million of new jobs between FY16 and FY17 to further replenish its existing order book.

Ikhmas Jaya owns a diversified machinery and equipment segment to support its core business activities. As of second quarter FY15, the net book value of Ikhmas Jaya’s machinery and equipment stood at about RM77.7 million (after utilising proceeds from the initial public offering), which was comparable to other significant piling contractors in town like Econpile Holdings Bhd (RM69.8 million) and Pintaras Jaya Bhd (RM110.9 million).

We expect earnings to grow 35.7% and 32.8% year-on-year for FY16 and FY17 respectively, backed by revenue growth of 26.3% and 24.8%. The strong growth in earnings is underpinned by its forward order book of about RM80 million and possible order book replenishment of about RM750 million in FY15, coupled with improving margins, given that Ikhmas Jaya strives to secure higher-margin works that preferably include design scopes.

We initiate coverage on Ikhmas Jaya with a TP of 81 sen, based on 13 times FY16F PER. The target PER assigned is in the range of upcycle PERs of small- and mid-cap contractors, amid the current booming infrastructure works. — JF Apex Securities Bhd, Nov 16