Investment Highlights

• We cut our FY19-21F net profit forecasts by 9%, 9% and 10% respectively and reduce our FV by 24% to RM1.30 (from RM1.72) based on 10x revised FY20F FD EPS (from 12x previously) to reflect the continuing de-rating of construction stocks. Downgrade to UNDERWEIGHT from HOLD.

• IJM’s 1HFY19 core net profit of RM233.9mil (adjusted for one-off items, largely forex losses) missed expectations at only 45% of our full-year forecast and 48% of full-year consensus estimates respectively. The variance against our forecast came largely from the weaker-than-expected plantation earnings. We have reflected lower plantation profits in our forecasts.

• 1HFY19 core net profit eased 7% YoY. Higher property development profits (due to higher billings and highmargin products) and lower taxes, were offset by weaker performance from construction (lower billings and margins), infrastructure (hurt by lower cargo throughput at the ports), plantation (lower sales volume and CPO prices, and start-up losses from young plantations in Indonesia) and manufacturing (the double whammy of lower volumes and margins).

• IJM currently sits on a construction order book of RM8.8bil. We are keeping our assumption that IJM will secure RM1.5bil worth of new construction jobs annually in FY19-21F. So far in FY19F, IJM has secured one key job, i.e. THE construction of Affin Bank’s new headquarters in Tun Razak Exchange (TRX) for RM505mil. IJM is eyeing work packages from the RM5bil Klang Valley Double Track project and several public hospital jobs (worth about RM500mil each). Internally, The Light City integrated project (part of Phase 2 of The Light Waterfront Penang) currently developed by a JV between IJM and Singapore-based developer Perennial Real Estate), could soon also tender out foundation works worth about RM100mil.

• IJM maintains its FY19F property sales target of RM1.6bil (which matches that of FY18). It will continue to focus on mid-priced and affordable products such as linked homes in Rimbayu (22’ x 70’; from RM842K/unit) and Seremban 2 (20’ x 60’; from RM388K) and high-rise residential units in Penang (from RM550K/unit) and Pantai Sentral Park (from RM275K/unit). Its unbilled property sales now stand at RM2bil.
• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector. We believe IJM is mitigated by its substantial order backlog that should keep it busy over the next 2-3 years, coupled with its proven ability to compete under an open bidding system.
• Similarly, we are also cautious on IJM’s other key businesses such as building material (due to the slowdown in the local construction sector), property (due to prolonged downturn in the local property market), plantation (due to the depressed palm oil prices) and toll road (due to the potential expropriation by the government)

Source: AmInvest Research - 27 Nov 2018