Ireka: Unexciting earnings but good yields

IREKA Corp Bhd's results for 2QFY12 were within our expectations on an annualised basis, as our forecasts were conservative to begin with.

However, earnings were substantially lower than 1QFY12 due to lower contributions from London-listed associate Aseana Properties Ltd (ASPL), as well as RM5 million in provisions for liquidated and ascertained damages arising from late delivery of Seni Mont'Kiara.

For 2QFY12, Ireka turned in a net profit of RM1.1 million on a revenue of RM112.7 million. This was a marked improvement over the net loss of RM87,000 posted a year ago, which was also hit by one-off provisions, but a substantial decline from a net profit of RM7.5 million in 1QFY12.

The first quarter saw contributions of RM7 million from ASPL, following the completion of Phase 1 of Seni Mont'Kiara. ASPL recognises profits according to IFRIC 15 (International Financial Reporting Interpretations Committee 15), where profits are recognised on full completion of the project, rather than on a progressive completion basis.

Contributions from associates declined to RM621,000 in 2Q. For the first half of FY12, Ireka posted pre-tax profit of RM9.4 million compared with a loss of RM2.9 million a year earlier. Net profit came in at RM8.6 million from a loss of RM3.1 million, while revenue was relatively flat, rising 1% to RM211.7 million.

Excluding the RM5 million provision, Ireka's construction division would have fared better, with six-month estimated pre-tax profit of RM7.2 million compared with RM5.9 million a year ago, with roughly flat revenue of RM198.7 million.

Concerns over sustainability of ASPL rebound, Vietnam
We are raising our net profit forecast for FY12 by 34% to RM13.1 million, or 11.5 sen per share. This places the stock at a forward price-earnings ratio (PER) of 6.4 times.

We also note, however, that Ireka's earnings tend to be lumpy and volatile on a quarterly basis, and FY13 could see a dip in earnings as ASPL will not be recognising profits from the completion of projects then.

ASPL has completed the second and final phase of Seni Mont' Kiara and obtained the certificate of fitness in October 2011. The units sold are currently being handed over to buyers. This could result in a stronger quarter ahead for Ireka and ASPL as the earnings are recognised by ASPL.

Continued concerns over the sustainability of ASPL's turnaround after the completion of Seni Mont'Kiara, as well as Vietnam's economy and property market woes will likely put a dampener on ASPL — and Ireka's share price.

Still, downside risks are low with the stock trading at single digit PER, and well below its book value of RM2.01. Plus, Ireka offers consistently high dividends, with a yield of 6.8% expected this year, based on five sen per share.

The sustainability of ASPL's turnaround is key to the re-rating of Ireka. However, ASPL will see lumpy earnings due to the adoption of IFRIC 15, which recognises profits on full completion, rather than on a progressive completion basis.

As such, the recognition of profits from both phases of Seni Mont'Kiara will boost earnings this financial year — in 1Q and 3Q. Going forward though, it will be difficult for ASPL to fill the void from Seni Mont'Kiara given its size, although it has several projects under construction in KL Sentral and Sabah.

ASPL's current ongoing projects include Sandakan Harbour Square, KL Sentral and International Hi-Tech Healthcare Park in Ho Chi Minh City, and a planned launch of condominiums in Jalan Kia Peng, in the KLCC area, in a 70:30 joint venture between ASPL and Ireka.

Moreover, the projects in Vietnam have mostly been deferred due to the weak economic outlook there.

The slump in Vietnam's property market since 2008 has affected sentiment for companies with exposure there, including ASPL. ASPL's shares fell as much as 89% to US$0.11 (34.5 sen) during the crisis, from an IPO price of US$1. They have fallen over the last three months from around US$0.46 to US$0.38.

The Jalan Kia Peng project on a one-acre site will comprise condominiums of 500 to 1,500 sq ft with an earlier estimated GDV of US$79 million. Launch of the project has now been deferred to the second half of 2012 due to planning delays.

This project should boost the bottomline of both ASPL and Ireka in FY15/FY16. Ireka is also embarking on projects in Nilai and Kajang.

For Ireka's construction arm, order book replenishment is key, but remains relatively slow. Nonetheless, its order book has been sustained at the RM400 million mark over the past three months, and it has secured three jobs worth RM400 million in the past year.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.