Higher construction profit expected for Jaks in 2HFY17

Jaks Resources Bhd (Oct 17, RM1.38)

Upgrade to buy with a target price (TP) of RM1.50: We are upgrading our rating on Jaks Resources Bhd to “buy” from “hold” while maintaining our TP at RM1.50. The recent share-price correction leaves Jaks’ current valuation at an undemanding 7.2 times estimated financial year 2018 (FY18) price-earnings ratio, in our view. We believe that as the delay in the Pacific Star project is to be resolved in 2018, the catalyst for the stock will turn to the progress of its Vietnam power-plant project.

Management is targeting to complete the overdue Pacific Star project by the end of 2018, as Jaks has secured the necessary financing recently together with unbilled sales of close to RM190 million. The completion of the project will also enable Jaks to dispose of the business hub (previously retail podium), which has recently been valued at RM240 million, and lower the group’s gearing. There could be downside risks to our forecasts if Jaks fails to meet the targeted schedule, as it will have to recognise higher liquidated and ascertained damages (LAD) cost.

The losses from its property segment are derived from both its Evolve Concept City Mall and Pacific Star. Although the turnaround of Evolve will take some time, the losses from Pacific Star can be reduced as they are mainly caused by LAD costs related to delays in project completion. The loss before interest and tax from the property segment was RM18 million in the first half of FY17 (1HFY17), while earnings before interest and tax for the group were only RM3.4 million, and the LAD cost from the delay was RM13 million.

We are also expecting a higher construction profit from both its domestic and Vietnam projects, coupled with a RM110 million one-off net gain arising from the proposed land disposal, to be recorded in 2HFY17.

We have also tweaked our earnings per share (EPS) forecasts to reflect the disposal gains in FY18-FY19, while lowering our EPS forecast in FY17 to reflect higher corporate costs. — Affin Hwang Capital, Oct 17

This article first appeared in The Edge Financial Daily, on Oct 19, 2017.

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