Investment Highlights

• We maintain our forecasts but raise our FV by 3% to RM1.26 (from RM1.22) based on “sum of parts” (SOP) (Exhibit 2) which values IJM’s construction business (within the SOP valuation) at 10x forward earnings. This is in line with our benchmark forward target P/E of 10x for large-cap construction stocks. The higher FV is to reflect our FV upgrade for IJM Plantations to RM1.58 from RM1.30. Maintain UNDERWEIGHT.

• IJM’s 1HFY20 core net profit of RM185mil (adjusted for one-off items including RM40mil impairment on the carrying value of its investment in Scomi Group) came in within our expectations at 47% of our full-year forecast but missed market expectations at only 42% of the full-year consensus estimates.

• 1HFY20 core net profit contracted 19% YoY. Higher profits from infrastructure (underpinned by cargo throughput at the ports of 13mil tonnes in 1HFY20, vs. 20.6mil tonnes for full-year FY19), building materials (due to higher margins from piles and ready-mixed concrete) and property development (arising from higher property handovers), 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 construction were relatively flat.

• IJM maintained its guidance for RM2bil new construction job wins in FY20F despite having yet to win any to date. Its optimism is premised upon it having submitted tenders for RM2bil contracts (we believe these are largely building jobs), having been pre-qualified to bid for RM4bil contracts and having identified RM5bil potential new jobs. It said that internal building works worth more than RM1bil from Phase 2 of The Light Waterfront Penang – currently under redesigning – are more likely to come through in 2Q2020.

• IJM currently sits on a construction order book of RM5.1bil (vs. RM6.1bil three months ago). To be more conservative, we assume that IJM will only secure RM1.5bil worth of new construction jobs annually in FY20–22F.

Source: AmInvest Research - 27 Nov 2019