JAKS Resources Bhd
(Sept 20, RM1.01)
Maintain buy with a lower target price (TP) of RM1.75: We remain optimistic about JAKS Resources Bhd’s outlook post our recent meeting with management. We expect earnings growth to be stronger in the second half of 2018 (2HFY18), driven by the higher revenue recognition from its Vietnam engineering, procurement, construction and commissioning (EPCC) contract; however, we are cutting our earnings per share (EPS) for FY18 estimate (FY18E) to FY20E by 9.4% to 12.8% and our TP to RM1.75 (from RM1.90) after factoring in higher losses from the property segment and the higher share base from the recent share placement. Nevertheless, we are maintaining our “buy” call due to its attractive valuation.
Despite 1HFY18 profit after tax and minority interests (Patmi) rising more than 44% year-on-year (y-o-y), earnings still fell short of our previous forecast, delivering only 32% of our full-year forecast.
However, we believe that JAKS could deliver stronger earnings in 2HFY18, as we expect JAKS to start recognising stronger revenue contributions from its Vietnam EPCC contract. Earnings recognition (progress) for its EPCC contract has a similar schedule as an S-curve, and hence we expect its contribution to peak by 1HFY19. Management guided that the project is still on schedule for commercial operation in 2020.
We believe that the biggest risk to our investment thesis is in JAKS’ property division, where both the property-development and mall-operation arms continue to be loss-making. We had previously assumed that JAKS would start handing the keys to its buyer (Pacific Star) by end-2018, but it has now been delayed until mid-2019. The delay was likely due to JAKS allocating resources from completing the Pacific Star (residential and office block) to completing the Star Tower, in our view. JAKS has also been appointed an external operator to help revamp its mall and reduce its expenses as well, but we believe that this will take some time for the benefits to materialise.
We are maintaining our “buy” call, while lowering our TP to RM1.75, on the back of EPS estimate cuts of 9.4% to 12.8% over FY18E to FY20E, as we factor in higher property losses from the property delay and the higher share base. We still believe that the stock is undervalued, trading at 6.6 times FY19E EPS. — Affin Hwang Capital Research, Sept 20