Ikhmas expected to resume growth trajectory on higher progress billing

Ikhmas Jaya Group Bhd (Feb 2, 56 sen)

Maintain buy with an unchanged target price (TP) of 75 sen: Ikhmas Jaya Group Bhd recently announced that it had accepted a letter of award from Mudajaya Corp Bhd to undertake subcontract bored pilling works (Zone 2 and Zone 3) for light rail transit (LRT) 3 package GS01. The contract value is RM38.5 million, consisting of RM19 million for Zone 2 and RM19.5 million for Zone 3.

Both works have a construction duration that is close to one year. Zone 2 work is expected to commence on Feb 15 and targeted for completion on Dec 31, 2018. Meanwhile, Zone 3 work started on Jan 29 with a targeted completion date of Jan 3, 2019. Year to date, the group has successfully secured contracts with a total value of RM38.5 million, accounting for 7.7% of our RM500 million estimated target order book replenishment for financial year 2018 (FY18). The current outstanding order book stands at RM741.5 million after taking into account this newly clinched contract. The outstanding order book provides earnings visibility of 2.4 times FY15 earnings assuming a net profit margin of 8%.

We retain our earnings forecast for FY17 and FY18 as this contract win falls within our target replenishment order of RM500 million for FY18. Risk in our earnings forecasts will be the slow execution of projects which might be affected by unforeseen hindrance in projects delivery.

Maintain “buy” with an unchanged TP of 75 sen. We derived our valuation by pegging at 13 times FY18 fixed deposit price earnings (PE). Our TP accounts for the enlarged share based upon completion of the private placement. The target PE assigned is at the range of upcycle PE for small- and mid-cap contractors with current booming infrastructure works. We maintain our positive view on the group as bored pilling and fundamental works remain vibrant. We believe the group will resume its growth trajectory in FY18 given higher progress billings as well as awards of more construction works, especially under the government’s initiative such as the Economic Transformation Programme, Transit-Oriented Development and the Corridor and City Transformation Programmes that would render job opportunities to Ikhmas Jaya. — JF Apex Securities Research, Feb 2

This article first appeared in The Edge Financial Daily, on Feb 5, 2018.

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