Ireka ... Jun10

S & P Results Review & Earnings Outlook

 Although Ireka’s FY10 (Mar.) revenue of MYR393.1 mln (+21.4%YoY) was 8.0% ahead of our forecast, its net profit of MYR8.7 mln (+45.0% YoY) was below expectations as it only reached 84.5% of our 2010 estimate.

 The better-than-expected FY10 revenue stems from higher progress billings (+27.7% YoY) on its ongoing projects, that helped to offset lower contributions from its trading (-21.4% YoY) and property (-92.7% YoY) divisions.

 The weaker FY10 earnings, meanwhile, were due to a 43.6% YoY increase in interest cost and a MYR2.9 mln loss recorded by its associate, Aseana Properties Ltd (ASPL LN, USD0.41, Not Ranked). FY10’s construction EBIT margin, however, was stable at 2.6%, but trading margins fell to 3.9% (vs. 5.2% in FY09).

 Ireka’s unbilled construction orderbook of MYR440 mln will underpin FY11 earnings, with margins likely to remain stable with few cost pressures. Most of its ongoing projects will be completed in FY11, but the construction start of a MYR272 mln high-end condominium at the KLCC precinct in mid-2011 will anchor construction earnings in FY12.

 After imputing a later start on its KLCC project, we trim our FY11 net profit estimate to MYR11.8 mln (from MYR17.9 mln). We also introduce our FY12 net profit estimate of MYR11.1 mln.

Recommendation & Investment Risks
 We lift Ireka’s recommendation to Buy (from Hold), but leave our 12-month target price of MYR0.88 unchanged.

 We continue to arrive at our 12-month target price on a blend of historical and relative price ratios. We ascribe unchanged P/B of 0.8x, P/Sales of 0.3x, relative PER target multiple of 9x on its FY11 earnings (unchanged) and by discounting expected dividend payments using the dividend discount model (unchanged WACC of 10.5and terminal growth rate of 3%). Our target price also includes an unchanged net
DPS estimate of 4.0 sen.

 Given Ireka’s recent share price fall, we lift our recommendation to Buy to reflect Ireka’s lagging performance against the Malaysia construction sector. While Ireka is not a major beneficiary of government projects, we believe that the worst is over and the recovery in property market sentiment will help to sustain a flow of new building contracts. In addition, Ireka’s prospective FY11 and FY12 PERs of 6.8x and 7.1x remains undemanding, being below the 8x-11x range of small-and medium-sized contractors in our coverage.

 Risks to our recommendation and target price include: (i) failure to replenish its orderbook that will hurt its outlook, (ii) unexpected rises in building materials cost affecting its margins, and (iii) prolonged delays in Aseana’s property projects that form part of its project management business.