Ireka Corporation Recommendation: HOLD Stock Code: 8834 Bloomberg: IREKA MK Price: MYR0.84 12-Month Target Price: MYR0.88 Date: April 9, 2010 Board: Main Pr ice 30 Day Movi ng Aver age Price (MYR) 2.00 Sector: Construction 1.80 1.60 GICS: Industrials/Construction & Engineering 1.40 Market Value - Total: MYR96.3 mln 1.20 1.00 0.80 0.60 Summary: Ireka is a construction, engineering and property 0.40 development and investment company with assets primarily in Malaysia and Vietnam. Volume Vol ('000) 3,000 Analyst: Kum Seng, Wan 2,000 1,000 0 Apr 07 Jun 07 Aug 07 Oct 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Dec 08 Feb 09 Apr 09 Jun 09 Sep 09 Nov 09 Jan 10 Mar 10 Recent Developments Recommendation & Investment Risks Ireka has secured a MYR36.2 mln contract from the Iskandar Regional We cut Ireka’s recommendation to Hold (from Buy), but leave our 12- Development Authority for the construction of an interchange for the month target price of MYR0.88 unchanged. proposed Bandar Indahpura, Kulai-Second Link Expressway. The project, which is allocated under the Ninth Malaysia Plan, will Our 12-month target price remains derived from a blended relative commence this month and completed in October 2011. approach. We ascribe P/B of 0.8x, P/Sales of 0.3x, and relative target PER multiple of 9x (all unchanged) to its respective FY11 (unchanged) Although the value of the contract is relatively small, is it welcomed as metrics and by discounting expected dividend payments using the it is Ireka’s first external project in more than a year that boosts its dividend discount model (unchanged WACC of 10.5% and terminal unbilled orderbook MYR570 mln (from MYR534 mln). We expect the growth of rate of 3%). We also include an unchanged net DPS project to command an EBIT margin of 6%-8% and with the bulk of the estimate of 4.0 sen to arrive at our target price. project to be recognized in FY11 (Mar), we lift our FY11 net profit estimate to MYR17.9 mln (from MYR17.1 mln). Our FY10 net profit We downgrade our call to Hold after its share price gained nearly 20% estimates remain unchanged. in the past two months. Although Ireka’s FY11 PER of 5.4x remains undemanding (vs. 8x-11x PER range of small-and medium sized Earnings Outlook contractors under our coverage), we think that further share price upside will be capped until Ireka secures more contracts to underpin its longer term earnings as most of its present projects will be completed Ireka’s MYR570 mln unbilled construction orderbook will underpin its in FY11. earnings over the next 12-18 months. In tandem with the recovering property market, its orderbook replenishment outlook is also Risks to our recommendation and target price include: (i) delays in the improving, where it is bidding for about MYR2.5 bln worth of new launch of the KLCC project that will hurt its outlook, (ii) unexpected projects. Ireka also plans to launch a MYR272 mln high-end serviced rises in building materials cost affecting its margins, and (iii) delays in apartment in the KLCC precinct in FY11 that will sustain its longer- Aseana’s property projects that would curtail its project management term earnings growth. Property management fees from Aseana earnings. Properties Ltd (ASPL LN, USD0.4425, Not Ranked), however, will only recover in FY11 when Aseana’s Vietnamese projects commence. Key Stock Statistics Per Share Data FY Mar. 2009 2010E FY Mar. 2007 2008 2009 2010E Reported EPS (sen) 5.3 9.0 Book Value (MYR) 0.81 2.08 2.05 2.11 PER (x) 16.0 9.4 Cash Flow (sen) -25.2 136.3 8.0 11.8 Dividend/Share (sen) 5.0 5.0 Reported Earnings (sen) -29.6 134.2 5.3 9.0 NTA/Share (MYR) 2.05 2.10 Dividend (sen) 8.8 10.0 5.0 5.0 Book Value/Share (MYR) 2.05 2.11 Payout Ratio (%) NM 5.4 69.9 40.9 No. of Outstanding Shares (mln) 113.9 PER (x) NM 0.6 16.0 9.4 52-week Share Price Range (MYR) 0.60 - 0.88 P/Cash Flow (x) NM 0.6 10.6 7.2 Major Shareholders: % P/Book Value (x) 1.0 0.4 0.4 0.4 Ideal Land Holdings Sdn Bhd 43.0 Dividend Yield (%) 10.4 11.8 5.9 5.9 Magnipact Resources Sdn Bhd 13.5 ROE (%) -26.5 93.1 2.6 4.3 *Stock deemed Shariah compliant by the Securities Commission Net Gearing (%) 95.1 18.6 36.0 43.5 All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 1 of 4 Ireka Corporation Recommendation: HOLD Stock Code: 8834 Bloomberg: IREKA MK Price: MYR0.84 12-Month Target Price: MYR0.88 Date: April 9, 2010 Profit & Loss FY Mar. / MYR mln 2008 2009 2010E 2011E Reported Revenue 299.7 323.7 363.9 518.1 Reported Operating Profit 164.2 12.4 17.8 30.2 Depreciation & Amortization -2.4 -3.1 -3.1 -3.2 Net Interest Income / (Expense) -5.8 -5.5 -6.9 -9.3 Reported Pre-tax Profit 158.4 7.0 11.0 21.1 Effective Tax Rate (%) 4.2 13.5 6.8 15.0 Reported Net Profit 152.9 6.0 10.3 17.9 Reported Operating Margin (%) 54.8 3.8 4.9 5.8 Reported Pre-tax Margin (%) 52.8 2.2 3.0 4.1 Reported Net Margin (%) 51.0 1.9 2.8 3.5 Source: Company data, S&P Equity Research All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 2 of 4 Required Disclosures Standard & Poor’s Equity Research Services Standard & Poor's and its affiliates provide a wide range of services to, or relating Standard & Poor’s Equity Research Services U.S. includes Standard & Poor’s to, many organizations, including issuers of securities, investment advisers, broker- Investment Advisory Services LLC; Standard & Poor’s Equity Research Services dealers, investment banks, other financial institutions and financial intermediaries, Europe includes Standard & Poor’s LLC- London; Standard & Poor’s Equity and accordingly may receive fees or other economic benefits from those Research Services Asia includes Standard & Poor’s LLC’s offices in Hong Kong organizations, including organizations whose securities or services they may and Singapore, Standard & Poor’s Malaysia Sdn Bhd, and Standard & Poor’s recommend, rate, include in model portfolios, evaluate or otherwise address. Information Services (Australia) Pty Ltd. CMDF-Bursa Research Scheme (“CBRS”) Glossary This report has been prepared by S&PM for purposes of CBRS administered by Bursa Malaysia Berhad, independent from any influence from CBRS or the subject Strong Buy: Total return is expected to outperform the total return of the KLCI or company. S&P will receive total compensation of RM15,000 each year for each KL Emas Index respectively, by a wide margin over the coming 12 months, with company covered by it under CBRS. For more information about CBRS, please shares rising in price on an absolute basis. visit Bursa Malaysia’s website at: http://www.bursamalaysia.com/website/bm/ Buy: Total return is expected to outperform the total return of the KLCI or KL Emas Index respectively, over the coming 12 months, with shares rising in price on an Disclaimers absolute basis. Hold: Total return is expected to closely approximate the total return of the KLCI or This material is based upon information that we consider to be reliable, but neither KL Emas Index respectively, over the coming 12 months with shares generally S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should rising in price on an absolute basis. not be relied upon as such. With respect to reports issued to clients in Japan and in Sell: Total return is expected to underperform the total return of the KLCI or KL the case of inconsistencies between the English and Japanese version of a report, Emas Index respectively, over the coming 12 months and share price is not the English version prevails. With respect to reports issued to clients in Germany anticipated to show a gain. and in the case of inconsistencies between the English and German version of a Strong Sell: Total return is expected to underperform the total return of the KLCI or report, the English version prevails. Neither S&P nor its affiliates guarantee the KL Emas Index respectively, over the coming 12 months by a wide margin, with accuracy of the translation. Assumptions, opinions and estimates constitute our shares falling in price on an absolute basis. judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not S&P 12 Month Target Price – The S&P equity analyst’s projection of the market necessarily indicative of future results. price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.