Investment Highlights

• We cut our FY20F forecast by 16% but keep our FV of RM1.26 based on “sum of parts” (SOP) (Exhibit 2), valuing 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 9MFY20 core net profit of RM237.6mil (adjusted for one-off items including RM40mil impairment on the carrying value of its investment in Scomi Group) came in below expectations at only 60% of our full-year forecast and 59% of full-year consensus estimates respectively. We believe the key variance against our forecast came from a higher-than-expected tax expense (which we have adjusted accordingly).

• 9MFY20 core net profit contracted 22% YoY. Higher profits from infrastructure (underpinned by a 40% YoY growth in cargo throughput at the ports), building materials (due to higher margins from piles and ready-mixed concrete) and property development (arising from higher property handovers) and plantation (higher production and selling prices realised), were more than offset by higher interest expense and tax, and profit payment to perpetual sukuk. Profits from construction were relatively flat.

• IJM currently sits on a construction order book of RM4.5bil (vs. RM5.1bil three months ago). During an analyst briefing three months ago, it maintained its guidance for RM2bil new construction job wins in FY20F. It has yet to win any with FY20F (Mar) coming to a close in slightly more than a month’s time. We assume that IJM will only secure RM1.5bil worth of new construction jobs annually in FY20– 22F. Meanwhile, it registered RM1.2bil property sales in 9MFY20, on track to meet its FY20F target of RM1.6bil. its unbilled property sales now stand at RM1.9bil, unchanged from three month ago.

• Given the still elevated national debt, we believe the government has very limited room for fiscal manoeuvre which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term. Not helping either, is the current political turmoil that could stall the award of new public 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 (it is uncertain if the recent spike in CPO prices will sustain) and toll road (due to the potential takeover by the government). Valuations are unattractive at 18–24x forward earnings on muted prospects.

Source: AmInvest Research - 26 Feb 2020