IREKA Corp's recent results for 3Q FY March 2010 were within our expectations. The company will see stable earnings over the next two years, underpinned by a large RM496 million construction orderbook, especially relative to its small market capitalisation of RM89 million.

At 78 sen, its shares are trading at undemanding P/Es of 7.9 and 7.5 times for FY10-11 and well below their latest book value of RM2.08 per share, with decent yields.

The company has set a dividend payout policy of 30%, but traditionally distributed more than that, paying dividends during loss-making years. Under its new asset-light corporate structure, capex requirements are low with funding required only for construction work. Assuming a lower payout of three sen in FY10-11 vs five sen in FY09, the gross dividend yield is an attractive 3.8%.

Recent results in line
Ireka's net profit of RM7.8 million for the first nine months of FY10 accounted for 70% of our full-year forecast of RM11.2 million, and would have been stronger if not for a one-off RM2 million provision in the latest quarter.

In 3QFY10, the company's revenue rose 18.8% to RM113.9 million year-on-year (y-o-y). Pre-tax profit declined 33% y-o-y to RM2.4 million, but still up from RM2.3 million in 2QFY10. This was due to higher interest costs and an unexpected loss of RM900,000 in its construction arm. Net profit fell 30.3% y-o-y to RM2.2 million.

For the first nine months of FY10, revenue rose 16.6% y-o-y to RM288.5 million. Pre-tax profit increased 189% to RM8.2 million while net profit rose 281% to RM7.8 million.

The core construction arm turned in a pre-tax profit of RM6 million on the back of RM268.1 million in revenue for the nine-month period. However, there was a loss of RM900,000 in 3QFY10, due to in a one-off provision of RM2 million. As a result, construction pre-tax margin declined from 4.2% in 1HFY10 to 2.3% for the nine-month period.

Management fee contributions from its London-listed property fund, Aseana Properties Ltd (ASPL) remain small due to the lack of NAV growth.
Ireka's net debt increased from RM115.6 million to RM152.3 million over the quarter, with gearing increasing from 48% to 64%. The increase was largely to fund receivables, which increased from RM183.7 million to RM225.6 million, due to the timing difference between progress billings and payment. As the receivables are almost wholly from ASPL, there are no credit risk issues.

It also made a payment of RM8.7 million, representing 10% part-payment for the RM87.1 million KLCC land purchase. Development will be undertaken by Ireka and ASPL on a 30:70 basis.

Near-term stable earnings from order book
Ireka's pre-tax profit over the last five quarters ranged between RM2.3 million and RM4.1 million, due to stable building material costs. This follows earlier construction losses before the global financial crisis that were caused by escalating building material costs.

We expect a similar sustained performance in the final quarter and into next year. Building material prices remain stable, although steel prices are starting to rise, and the company is now working on its newer, higher-margin projects, notably SENI Mont'Kiara.

Ireka's revenues are largely assured over the next 1½ years, supported by a large orderbook which will underpin construction earnings. Its outstanding unbilled order book stood at RM496 million as at Dec 2009, about 1.5 times annual turnover — and far larger than its RM83 million market capitalisation.

However, we note that its unbilled order book has been declining as more projects are progressively completed. This has fallen from RM650 million in July 2009 to RM609 million in Sept 2009 and RM496 million in Dec 2009.

With its balance sheet now in a much stronger position, Ireka is in a better position to bid more aggressively for external construction jobs.
However, there has not been much orderbook replenishment from external jobs, as opportunities have been fairly limited — not just for Ireka but the general construction sector due to the recession. Nonetheless, the resumption of new property launches and expectations of infrastructure projects kicking off should create more job opportunities.   

In Oct 2009, Ireka secured a contract from a unit of Malaysian Resources Corp Bhd (MRCB) to undertake sub-contractor works for earthworks, foundation and structural works for the basements and podium levels for the Aseana-MRCB office towers and hotel joint venture in KL Sentral.

Order book mix to improve
Going forward, Ireka's order book product mix will improve as older projects are completed and replenished by newer, better-margin ones that were priced when building material prices were higher, notably SENI Mont'Kiara.

Prices of building materials remain relatively stable due to still sluggish demand, excess supply and uncertainties over the strength of the global economic recovery. Nonetheless, we note that the price of steel bars has been rising in recent weeks, to around RM2,200 per tonne from RM2,000 at the start of the year.

The risk to margins would be if the prices of commodities or fuel costs continue to rise. This could happen if the US dollar depreciates further, inflationary expectations build up, or commodity prices rise due to speculative fund purchases. Nonetheless, the remaining order book is skewed towards higher-margin products, which should provide some buffer.

ASPL's planned project launches in Vietnam have not taken off strongly due to the dampened property market there caused by a range of economic issues over the last year or two — ranging from the global crisis to high interest rates, currency devaluation and the exit of foreign investors.

The pipeline of projects in Ho Chi Minh City includes Queen's Place and Hi-Tech Healthcare Park. We understand piling works are in progress for the first phase (250-bed) of the 500-bed general hospital at Hi-Tech Healthcare Park, which will anchor the park.

In Malaysia, construction of the KL Sentral project, a joint venture between ASPL and MRCB, is progressing well. The project involves two office towers and a four-star hotel. The two office towers have been sold en bloc to Korean parties while the hotel will be kept by ASPL.

SENI's sales, ASPL's share price improving
Sales of SENI Mont'Kiara, the 605-unit luxury condominium in Mont'Kiara developed by ASPL, have improved since the company introduced more attractive financing packages in mid-2009.

Its sales rose to 64% in Oct 2009, from 61% in Aug 2009 and 53% in June 2009. We understand the take-up rate is now around 70%, although sales have slowed in recent months as sentiment turned more cautious, especially in the wake of the real property gains tax re-imposition.

More potential buyers may have also flocked to Sunrise's 28 Mont'Kiara project. 28 Mont'Kiara was soft-launched in Dec 2009 and has since seen a near 50% take-up rate of the 460-unit development. The unit sizes are roughly similar to SENI Mont'Kiara's, with a better location along Jalan Kiara.

We also note that ASPL's London-listed share price continues to recover after plunging in late 2008 due to the global recession. This is positive in supporting Ireka's underlying asset valuation.

ASPL's shares last traded at US$0.46, from US$0.40 in Nov 2009, US$0.24 in Aug 2009 and a low of US$0.12 a year ago. Nonetheless, they are still well below the IPO price of US$1 and NAV of US$0.88, as at Sept 2009.

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