Jaks Resources Bhd (Nov 23, RM1.41)

Maintain buy with a higher target price (TP) of RM1.75: While the Vietnam engineering, procurement and construction (EPC) recorded a 1.7% year-on-year (y-o-y) decline in revenue, profit from the segment for the nine months of financial year 2017 (FY17) at RM35.4 million was up by 18% y-o-y, and it is the most profitable project for Jaks.

Although revenue growth for the first three quarters appears to be on a declining trend, management has indicated that the trend should reverse as it is expecting a stronger growth momentum in the fourth quarter (4Q), as more work is expected to be done before the Chinese New Year holidays. As such, we are expecting contribution from the segment to double in 4Q from the RM10.2 million recorded in 3Q.

The property segment recorded a small profit before tax gain of RM1 million for 3QFY17, which is a significant improvement over the losses from the previous quarters. We believe that this was mainly due to the reversal of a liquidated and ascertained damages (LAD) provision which totalled RM18.1 million.

Excluding this, the segment loss before tax widened quarter-on-quarter to RM17.1 million from RM13.9 million. However, we expect the losses to narrow as LAD costs would be reduced as Jaks starts to deliver the units to its buyers in 1QFY18. Recent sales numbers for the project is also encouraging, as it has sold close to 94% of the units (office and apartments) of the Pacific Star project.

We are maintaining our “buy” call on the stock, with a higher RNAV-based 12-month TP of RM1.75, as we roll forward our valuation to 2018 and given the better visibility of its Vietnam EPC contract. The key downside risks could arise from: i) how its Vietnam project is progressing, ii) domestic construction order book wins, and iii) higher-than-expected losses from its property segment. — Affin Hwang Capital Research, Nov 23

This article first appeared in The Edge Financial Daily, on Nov 24, 2017.

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