Fair value of Ikhmas Jaya shares at 63 sen: Inter-Pacific

PETALING JAYA: Inter-Pacific Research Sdn Bhd has placed a fair value of 63 sen on Ikhmas Jaya Group Bhd, implying a 20% discount to Econpile Holdings Bhd (12 times).
"We believe this discount is justified given Econpile's larger market cap (excess of RM276 million) and stronger balance sheet than Ikhmas Jaya. We believe the healthy construction market will continue to create an upward trend for the bore piling players on the back of fast implementation of both public and private infrastructure and property projects in the nearer future," it said in its research note yesterday.
Ikhmas Jaya will be listed on the Main Market on July 27. Its initial public offering price was 57 sen. The retail offering comprising 26 million shares was closed yesterday.
According to Inter-Pacific Research, investment merits for the stock include Ikhmas Jaya being a total piling solutions provider; its long and successful track record; sizeable fleet of construction equipment; a healthy order book of RM346 million and the positive outlook of the construction industry, which is poised for future growth.
Since 2003, Ikhmas Jaya has been performing piling works, constructing retaining walls and constructing basement.
"Piling work is at the core of Ikhmas Jaya's work, specialising in bore piling and micropiling. Bore piles are used to support high-rise buildings while micropiles are used to strengthen existing foundations. Basement and retaining walls are sometimes incorporated within the job scope to help stabilise surrounding earth from erosion," it said.
The company is headed by executive directors Siew Mun Lout and Datuk Dr Khoo Ping Sen with 30 out of its 37 engineers dedicated to the design and construction work for bore piling. To date, it has performed bore piling works with a total contract sum of RM823 million.
The company has been in the engineering and construction business for some 20 years and has completed a wide range of projects with a total contract sum of RM1.7 billion.
Its group managing director Datuk Ang Cheng Siong has over 30 years experience and the rest of its management team has at least 25 years of construction experience.
"We think service quality and track record will help to earn more customers through favourable referrals from existing customers," said Inter-Pacific Research.
The company also owns close to 100 diversified fleet of machinery and equipment. Operating its own tools enables it to adopt various construction methods to meet customer's requirement, be flexible in pricing tenders and differentiate itself from other service providers that rely on rented tools.
Ikhmas Jaya has a healthy order book of RM346 million with almost 90% of these projects scheduled for completion by end of 2015. Its tender book is currently at RM3 billion and it aims to tender for an additional RM1-RM2 billion jobs by year-end.
"Furthermore, Ang notes that the group's success rate in securing projects is normally around 15% to 20%," said Inter-Pacific Research.
The research house said Ikhmas Jaya would also benefit from government initiatives, including the 11th Malaysia Plan under which the construction sector is expected to grow 10.3% per annum with a contribution of RM327 billion to gross domestic product by 2020.
"Meanwhile, the quasi-public sector has been the biggest contributor to new job awards, providing an average of 70% of new projects from 2006 to 2013.
"Hence, we think Ikhmas Jaya, as one of the largest piling contractor with a niche in transportation and bridge infrastructure, is anticipated to benefit from the buoyancy of the construction sector," it added.
Meanwhile, investment risks include the cyclical nature of the property development and construction industry, whereby a slowdown would affect the company's topline growth. However, its specialisation would enable it to be flexible in job replenishment.
Stiff competition from other piling contractors is also an investment risk to Ikhmas Jaya, as there are some 372 grade C7 operators under the category of Piling Works for Building Construction registered with the Construction Industry Development Board.
However, Ang noted that project owners prefer to award piling companies that provide end to end piling solutions rather than segment offerings thus, Inter-Pacific Research believes that the company's business strengths would enable it to remain competitive.
Besides piling and foundation works, the company is also involved in bridges and buildings construction as well as other civil works. It also manufactures and installs prefabricated building system. It holds a Grade 7 license which allows unlimited tender capacity.
Its dividend policy is to distribute a minimum dividend of 20% of annual net profit attribution to shareholders.
It delivered a three- year compounded annual growth rate of 37% growth in revenue during 2011-2014. Revenue is estimated to grow 21% and 27% for FY15 and FY16 respectively.