Ikhmas Jaya Group : Only moderate earnings growth in FY16 BUY

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Ikhmas Jaya Group : Only moderate earnings growth in FY16       BUY

We are cutting our FY16-18F earnings forecasts for Ikhmas by 22%, 20% and 10% respectively. This is largely to reflect the delays in two key projects: the flyover package for a road upgrading project outside of the Klang Valley, and the basement package for a high-rise project in the Klang Valley. Ikhmas was not successful in its bids for the Pan Borneo Highway, SUKE and PR1MA housing work packages - but for good reasons. It believes the winners generally have not priced in enough buffers for price increases and delays. Given the intense competition at the main contracting level for the Pan Borneo Highway, MRT2 and key expressway projects, Ikhmas now focuses on “opportunistic” sub-contracting works for these projects. For the Pan Borneo Highway, there is a possibility that Ikhmas will take on sub-contracting work packages. Nonetheless, it will be selective with the main consideration being that the main contractors must have control over the supply and pricing of building materials. Similarly, for MRT2 and key expressway projects, Ikhmas is prepared to participate as a sub-contractor by leveraging on its forte in bored piling. In addition, it is all ready to double up as a “rescuer” for the projects if the projects’ existing contractors fail to perform.

Ikhmas guided for best-case job wins of another RM500mil before the year is out, on top of RM438mil secured YTD, pinning its hopes on sizeable public works. We are more inclined to be more prudent by keeping our replenishment target for Ikhmas at RM500mil annually in FY16-18F. We now projecting FY16 earnings of Ikhmas to only grow by 13.3% (vs. 45.9% previously), and we project for this to accelerate to 29.6% in FY17, driven by an outstanding orderbook of RM666mil. Despite the earnings downgrade, we are keeping our FV at RM0.92 as we roll forward our valuation base year to FY17F (from FY16F). We value Ikhmas at 13x forward earnings, 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. Maintain BUY.

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