Investment Highlights

• We revise our FY20–21F net profit forecasts downwards by 3% and 1% respectively (largely to update our forecasts for IJM Plantations) but maintain our FV of RM1.22 based on sum-of-parts (SOP) (Exhibit 1), which values IJM’s construction business (within the SOP valuation) at 10x forward earnings, in line with our benchmark forward target P/E of 10x for large-cap construction stocks. Maintain UNDERWEIGHT.

• IJM’s 1QFY20 core net profit of RM101.1mil (adjusted for one-off items including RM40mil impairment on the carrying value of its investment in Scomi Group) came in within expectations at 25% and 23% of our full-year forecast and the full-year consensus estimates respectively.

• 1QFY20 core net profit contracted 26% YoY. Higher profits from infrastructure (underpinned by higher cargo throughput at the ports) and building materials (due to higher margins from piles and ready-mixed concrete), coupled with reduced plantation losses (in the absence of lumpy forex losses), were more than offset by higher interest expense and tax, and profit payment to perpetual sukuk. Profits from property development and construction were relatively flat.

• During a recent briefing, IJM said that it is confident on achieving RM2bil new construction job wins in FY20F vs. RM505mil it secured in FY19. It is eyeing largely building jobs from reputable clients and building works from Phase 2 of The Light Waterfront Penang worth about RM1.5bil. IJM currently sits on a construction order book of RM6.1bil. We are keeping our assumption that IJM will secure RM1.5bil worth of new construction jobs annually in FY20–22F, just to be conservative.

• Also, it hopes to in FY20F match its property sales of RM1.6bil achieved in FY19. It will continue to focus on landed homes in Bandar Rimbayu (22’ x 70’; from RM843K/unit), Seremban 2 Heights (20’ x 70’; from RM555K and 24’ x 75’; from RM680K) and Austin Duta, Johor Bahru (22’ x 70’; from RM619K/unit and 32’ x 60’; from RM747K/unit), and high-rise residential units in Penang (from RM550psf) and Segambut (from RM600psf). Its unbilled property sales now stand at RM2bil.

• We maintain our view that valuations of construction stocks, IJM included, have run ahead of their fundamentals in the heat of the euphoria sparked by the recent revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects (more so, IJM may not even be participating in the ECRL project as the high-value portions of the Chinesecontrolled turnkey construction job are unlikely to be made available to local players).

• We believe the fact remains that given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the ECRL project could be a “zero-sum game” as it impedes the government’s ability to implement other public infrastructure projects.

• Similarly, we are cautious on IJM’s other key businesses such as building material (due to the slowdown in the local construction sector), property (due to oversupply and a tight lending policy by the banks), plantation (due to the depressed palm oil prices) and toll road (due to the potential takeover by the government). Valuations are unattractive at 18–20x forward earnings on muted prospects.

Source: AmInvest Research - 29 Aug 2019