Monday, April 17, 2017

Plantations Sector : Palm oil falls to 6-month low on strengthening ringgit

Ikhmas Jaya Group : Bags letter of intent for RM34mil piling job BUY

We maintain our forecasts, BUY call and FV of RM0.76, following the announcement of a letter of intent for a RM33.8mil job for piling and substructure works for a commercial development in Subang Pelangi, Shah Alam. Our FV is based on 13x FY17F EPS of 5.9 sen, at a slight premium to our 1-year forward target PE of 10-12x for small-cap construction stocks, to reflect a relatively less competitive piling segment vis-à-vis general contracting. We are positive on the latest development. While technically Ikhmas has yet to formally secure the job (as it has only received a letter of intent and not a letter of award), work already started on 15 April 2017. As such, we believe it is appropriate for us to consider the latest job being part of its YTD job wins (amounting to RM81.5mil) and order backlog (estimated at RM728.9mil) (Exhibit 1).

We are keeping our forecasts that assume job replenishment of RM500mil annually in FY17-19F, which is consistent with actual job wins of Ikhmas of RM496mil in FY16. Ikhmas is a good proxy to the booming piling/foundation segment underpinned by current mega infrastructure projects such as MRT2, Pan Borneo Highway, SUKE and DASH, as well as those that are getting off the ground over the short to medium term such as LRT3, ECRL and KL-Singapore HSR. Its earnings visibility is strong backed by a sizeable order backlog which will keep it busy for the next 12-24 months. The entry barrier to the sector is high given the high costs of equipment and machinery as well as the limited availability of experienced operators.

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