Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.26 based on “sum of parts” (SOP) (Exhibit 1), 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.

• IJM has been awarded by LQ Residential 1 Sdn Bhd (a JV between Australia-based property group Lendlease and TRX master developer TRX City Sdn Bhd) a RM530mil contract for superstructure works of two residential towers in Tun Razak Exchange (TRX). This is the fourth major building job IJM has secured in the new KL financial hub project, following HSBC Malaysia headquarters, Affin Bank headquarters and Menara Prudential.

• The latest contract is the first major job IJM has secured in FY20F (Mar), boosting its outstanding construction order book to RM5bil that should sustain IJM for another 2–3 years based on its churn rate of RM1.5–2.0bil annually.

• With FY20F coming to a close in 2–3 weeks, IJM is set to miss its guidance for RM2bil construction job wins, as well as our more conservative assumption of RM1.5bil. We will have to downgrade our FY21–22F net profit forecasts by 4% each if IJM does not secure more new construction jobs by the end of the month.

• Given the still elevated national debt coupled with the recent collapse in oil prices that will put a significant dent in petroleum revenues, 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 delicate political situation currently 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) and plantation (as CPO prices have started to trend downwards after the recent spike). Despite the significant correction in IJM’s share price of late, its valuations remain unattractive at 15–20x forward earnings on muted growth prospects.

Source: AmInvest Research - 11 Mar 2020