THE earnings turnaround for Ireka Corp (76 sen) continues. The company was solidly in the black for the third consecutive quarter as its core construction arm benefited from stable building material costs. At 76 sen, its shares are trading at price-to-earnings (P/E) valuations of just 7.7 and 7.3 times for FY10-11, and well below their latest book value of RM2.08 with decent yields.
Ireka's recently released results for the first quarter of 2010 (1QFY March 2010) (April-June 2009) were within our expectations. Revenue increased 36.2% year-on-year (y-o-y) to RM85.6 million. Pre-tax profit fell 7.3% y-o-y to RM3.5 million while minimal taxes resulted in net profit rising 17.3% y-o-y to RM3.5 million.
Its quarterly profits have been fairly consistent over the past three quarters — after the earlier losses caused by the sharp surge in building material costs. The company reported pre-tax profit of RM3.6 million in 3QFY09, RM4.1 million in 4QFY09 and RM3.5 million in 1QFY10.
We expect a similar sustained performance in the coming quarters. Building material prices are stable and Ireka is now working on its newer, higher-margin projects (notably Seni Mont' Kiara), all undertaken for its London-listed property fund arm, Aseana Properties Ltd (ASPL).
The construction arm is turning around well. Construction revenue rose 52% y-o-y to RM80.5 million for 1QFY10. It reversed from a pre-tax loss of RM2.5 million to a pre-tax profit of RM4.3 million, as pre-tax profit margins improved to a decent 5.3% in 1QFY10 from 2.6% in FY09.
The company's net debt increased from RM84.2 million to RM107.7 million over the last quarter, with gearing at a manageable 45%. The increase was largely to fund receivables, due to the timing difference between billing and payment. Receivables rose from RM144 million to RM177 million, but are mostly from ASPL.
Ireka has proposed a final dividend of five sen per share for FY09, comprising 2.6 sen gross and 2.4 sen net — or 4.35 sen net. This translates into a generous net yield of 5.7% at the current share price. The ex-date has yet to be determined.
Earnings supported by large order book
The global and domestic economy has already seen its worst in 1Q09 and is on the road to recovery — although likely a slow one. The government's stimulus programmes should spur the construction sector and create more job opportunities.
Over the past few years, Ireka's construction arm has focused on its own property-related projects given the large number of launches, cost volatility (and losses) for older external projects and a highly geared balance sheet that limited the capacity to take on large jobs.
With Ireka now running down on its existing order book, its post-restructuring balance sheet in good shape and the property recovery likely to be less exuberant (as it tends to lag the economy), we think the company will soon start to bid for external construction jobs.
If the property market recovers strongly earlier than expected, ASPL has a pipeline of new projects to be launched in Malaysia and Vietnam, which should keep the construction arm busy.
Ireka's revenues are largely assured over the next two years, supported by a large order book. Its outstanding unbilled order book stood at RM650 million in July 2009. Building material costs have stabilised after the steep fall from 4Q08 and the order book product mix will improve going forward as older projects are completed.
The older projects were earlier most affected by higher cost structures due to their lower original contract prices. These include I-Zen@Kiara 1 (completed in June 2008), Tiffani by i-Zen (recently completed) and One Mont' Kiara (which will complete in 2Q2010).
As these older projects are being progressively completed, the order book is being replenished by newer and better margin ones, priced when building material prices were much higher. Most notable is the RM539.8 million Seni Mont'Kiara contract secured in July 2008, which forms the bulk of the outstanding order book.
Prospects for ASPL improving
Sales of Seni Mont' Kiara, the 605-unit luxury condominium development in Mont' Kiara developed by ASPL, has been improving since it introduced more attractive financing packages in June 2009. Its sales status improved to 61% in August 2009, from 53% in June 2009 and around 51%-53% in the preceding few quarters.
Property developers have been enjoying relatively brisk sales in the last couple of months as low interest rates, innovative financing schemes and discounts start to attract buyers. However, most of these sales are from existing inventories, rather than new projects.
We also note that ASPL's London-listed share price is recovering after plunging last year. Its shares are currently trading at US$0.25 (RM0.875), up from US$0.20 in the previous quarter and US$0.12 six months ago — although still well below the IPO price of US$1 and latest net asset value (NAV) of US$0.911.
Asset-light business model in place
Ireka has a good business model in place. It currently enjoys a steady stream of sustainable earnings, balanced with cyclical construction profits. The construction arm's large order book will keep it busy for the next two years and margins should look better.
With all its construction jobs undertaken for "in-house" projects, i.e. by ASPL, there should be almost negligible default or late payment risks.
From ASPL, Ireka will earn stable annual management fees, plus dividends and upside from performance fees, although that is probably unlikely in the near term, given the weak state of the property market.
Through ASPL, Ireka has access to a large war chest for future investments, giving it a far larger scale of operations than otherwise possible due to its small size. An asset-light balance sheet also insulates the company from a major downturn and can sustain high dividends.
The construction order book is likely to grow further, given the pipeline of ASPL's new projects, which include two office towers and a hotel within KL Sentral and two joint-venture projects in Ho Chi Minh City, Vietnam. The timing of these projects will depend on market conditions.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.