AmWatch - Ikhmas Jaya Group : Good prospects for bore piling specialist, 23 Jul 2015

STOCK FOCUS OF THE DAY

Ikhmas Jaya Group : Good prospects for bore piling specialist   Buy

We initiate coverage on Ikhmas Jaya Group Bhd (IJGB) with a BUY call and a fair value of RM0.70/share, pegged at 12x PE FY15F. Our investment thesis is premised on:- (i) IJGB’s position as a leading bore piling specialist in the market; (ii) IJGB’s diversified earnings (vs. other listed piling contractors) given its involvement in superstructure works, bridge construction and PBS; (iii) strong outstanding order book of RM346mil (1.2x FY14 revenue) towards supporting earnings; (iv) tender book of ~RM3bil. We have assumed new order book replenishment of RM300mil-RM330mil for FY15F-17F, based on a conservative win rate of ~10%; and (v) net margins to remain intact at ~8%.

We forecast IJGB’s earnings to grow 40% this year to RM30mil on the back of the strong outstanding order book. Note that 90% of the jobs will be completed by year-end. Earnings are expected to rise further by 8%-10% to RM33mil and RM36mil for FY16F and FY17F, respectively (CAGR: 19%). This is on the back of a topline CAGR of 13% over the next three years. We expect net margins to remain at the current level of ~8%.

Management is expected to bid for another RM1bil-RM2bil worth of jobs by year-end. IJGB won ~RM29mil worth of jobs in 1H15. Post IPO (and before utilisation of proceeds), IJGB is expected to be in a net cash position vs. a net gearing of 0.5x as at end-FY14.

IJGB has a policy to distribute 20% of PAT to shareholders. We forecast DPS of 1.2sen-1.5sen for FY15F-17F. These translate to yields of 2%-3% based on the IPO price. IJGB will raise up to RM71.8mil from the IPO with 51% allocated to expanding its construction capacity and PBS business and 17% to repay borrowings. At an IPO price of 57sen, IJGB will have a market capitalisation of RM296mil upon listing on 27 July. Key risks include project delays, a slowdown in construction tenders, and contraction in margins. Further upside stems from better-than-expected job wins and margins.

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DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.