This article first appeared in The Edge Financial Daily, on March 10, 2016.

Jaks Resources Bhd
(March 9, RM1.12)
Maintain trading buy with fair value (FV) of RM1.53: We met up with the management of Jaks Resources Bhd to obtain clarification on its financial year 2015 ended Dec 31, 2015 (FY15) results and the progress of its flagship Vietnam project. We came back feeling reaffirmed with its prospects premised on the management’s commitment to and focus on executing its ongoing projects, which are progressing well on time, coupled with its aim to de-gear further from its current net gearing level of 1.0 time through the disposal of its investment property assets and development project. Hence, we are reiterating our “trading buy” call on JAKS with an unchanged FV of RM1.53 based on 25% discount to its sum-of-parts (SoP) value of RM2.04.

Jaks just concluded its FY15 results, registering a core net profit (CNP) of RM14.5 million, which was lower than our full-year expectations of RM19.3 million. Our CNP was derived after excluding the net gains from the disposal of the 70% stake in a subsidiary (RM30.1 million); disposal gains on property, plant and equipment (RM33 miliion); impairment losses from three of its divisions, namely construction (RM23 million), property (RM6 million) and manufacturing (RM7 million), totalling RM36 million. However, we deem that its performances are still commendable as it managed to grow its CNP by 4.7 times year-on-year, albeit a lower revenue (8%), thanks to better contribution from its construction (9%), trading (11 times) division and also lower minority-interest contribution (72%).

One of the major highlights during our meeting with Jaks was the progress of its circa RM1.9 billion Vietnam project. According to the management, the non-technical works are progressing as planned and the groundbreaking ceremony is expected to take place by month end. Hence, it is expecting minimal contribution from Vietnam in the first half of 2016 (1H16), as the contribution is only expected to gradually increase in 2H16 when construction progress picks up pace. As for its local projects, Jaks has amassed a total outstanding order book of circa RM800 million, which together with property sector’s unbilled sales of RM300 million, will keep it busy for the next two to three years.

In our previous report dated Oct 6, 2015, we highlighted that the management was looking at the disposal of its 51%-owned mall in Ara Damansara, Evolve Concept Mall, for a total consideration of circa RM450 million. On top of that, the management was also looking at the possibility of securing an en bloc sale for its development project, Pacific Star, with an estimated gross development value of RM300 million in FY16. Notably, Jaks managed to improve its net gearing to 1.02 times in the fourth-quarter ended Dec 31, 2015, vis-à-vis 1.26 times as per our previous report, and we reckon that should it successfully proceed with the two disposals as planned, Jaks would be in a strong net cash position.

Should Jaks prove able to proceed with its two planned disposals, we believe there could be more earnings upside to our FY16 to FY17 earnings estimates by another 10% to 15%, arising from the potential interest savings from the full settlement of its debts. However, we have yet to factor this into our FY16 to FY17 earnings estimates at this juncture, as the timing of the disposals remains fluid.

Post meeting, we felt reassured with Jaks’ prospects given the timeliness in managing the progress of its ongoing construction projects, especially on its Vietnam’s non-technical works, which are expected to see major contributions from 2H16 onwards. Besides, we also like Jaks for its strong outstanding order book of RM2.7 billion and unbilled sales of circa RM300 million, providing them earnings visibility and growth for the next two to three years.

Hence, we reiterate our trading buy call on Jaks with an unchanged fair value of RM1.53 based on a 25% discount to its SoP value of RM2.04, with an implied FY16 price-earnings ratio of 7.1 times, which is still below our construction mid-cap average. We deem that our applied discount of 25% to Jaks is fair as it is in line with the SoP discount range of 25% to 30% applied to the developers cum contractors under our coverage. — Kenanga Research, March 9