We are bringing a closure to our previous ‘Trading Buy’ call on JAKS given that the share price had performed relatively well with a year-to-date return of 52% coupled with its rich valuations as it is trading at FY18E PER of 12.0x which is higher than its peer average of 11.0x. We are projecting FY17-18E CNPs of RM41.5m-RM56.1m. Not Rated with a Fair Value of RM1.54 based on Sum-ofParts valuation.

Striving hard to deliver... Since our last trading buy call with a fair value of RM1.53 back in March-2016, its earnings performance has been weak, registering a net profit of only RM0.7m for FY16 vis-à- vis net profit of RM41.5m in FY15, down by 98%, YoY. Its weak earnings delivery was mainly due to unexpected losses from its investment property i.e. EVOLVE concept mall, liquidated and ascertained damages from its Besut and Pacific Star projects. However, its 1Q17 saw a turnaround with its net profit surging >600%, YoY to RM7.5m, mainly driven by the strong contribution from its Vietnam project.

Construction in progress. While JAKS had faced some delays in their local and overseas construction jobs back in FY16 due to various reasons, we believe works have finally picked up pace as they staged strong growth in their construction revenue at 51% YoY in 1Q17, of which 60% were from local jobs while the remaining 40% from its Vietnam project. Going forward, we are expecting its construction division to be the main anchor for the group’s profitability for the next two years underpinned by a decent outstanding order-book size of RM2.6b of which 63% are from Vietnam while the remaining from Malaysia.

Asset disposal still on the cards. To recap, JAKS’ net gearing was high at 0.86x back in FY16 and management has always been looking for suitors to dispose of its Evolve Concept mall for degearing purposes. While net gearing had significantly improved to 0.63x in 1Q17 thanks to its cash call exercise which raised RM59.6m from the recent placement of new shares, management are still looking to further lighten up its balance sheet through the sale of its assets i.e. Evolve Concept Mall and its land in USJ measuring c.15 acres which we reckon would easily raise proceeds of up to RM400.0-500.0m, bringing them into a net cash position.

Earnings forecast. Going forward, we are projecting FY17-18E CNPs of RM41.5-56.1m, staging a strong recovery from its poor FY16 performance with an estimated net profit growth of >100%, YoY, driven by its construction division’s outstanding order-book of RM2.6b, as its local and overseas projects continue to pick up pace.

Closing position. We are closing our previous position for JAKS with a take profit call at a fair value of RM1.54 based on Sum-ofParts valuation. At our Target Price of RM1.54, it implies FY18E PER of 12.0x, which is relatively rich as compared to its peers’ average of 11.0x, especially when there were several times of hiccups in earnings delivery in the past. Furthermore, its share price has performed relatively well since beginning of the year, registering a year-to-date return of 49%. We believe that the next catalyst for JAKS would be the disposal of assets, which will lighten its balance sheet to take on more jobs in the future both locally and overseas

Source: Kenanga Research - 16 Jun 2017