Investment Highlights

• We cut our FY20–22F net profit forecasts by 17%, 17% and 3% respectively, but keep our FV relatively unchanged at RM1.25 based on “sum of parts” (SOP) (Exhibit 1) as we now value IJM’s construction business (within the SOP valuation) at 12x forward earnings (from 10x previously) to reflect a reduced market risk premium as investors globally have turned risk-on on optimism on the economy reopening. Maintain UNDERWEIGHT.

• The earnings downgrade is to better reflect the direct and indirect impact of the movement control order (MCO) and conditional MCO from 18 Mar to 9 June 2020 (which has spanned over FY20F and FY21F for IJM, given IJM’s Mar year-end) on IJM’s construction, manufacturing and port activities, and property sales and toll road collections.

• We expect IJM’s FY20 results, due out on 26 June 2020, to come in at RM270mil to RM280mil at the core net level (adjusted for one-off items, particularly, the RM40mil impairment on the carrying value of its investment in Scomi Group). This will translate to a 33–36% YoY decline vs. a RM420.1mil core net profit registered in FY19, with the key culprits being: (1) the already weak 9MFY20 performance (prior to the pandemic); and (2) the direct and indirect impact of the MCO during 4QFY20 on IJM’s operations across the board.

• We estimate that IJM currently sits on a construction order book of RM4.5bil, which is less than half of RM9.4bil it carried two years ago during the peak of the previous construction cycle in 2018. It only managed to secure a RM530mil contract for superstructure works of two residential towers in Tun Razak Exchange in FY20 (vs. its guidance for RM2bil). Our forecasts assume IJM to secure RM1.5bil worth of new construction jobs annually in FY21– 22F.

• Given the still elevated national debt and the still depressed oil prices (that will hurt 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. Meanwhile, the news flow on the local construction sector has been negative of late:
  
  1. Contrary to market speculation, the RM110bil KLSingapore High Speed Rail (HSR) project has not been revived. Instead, the governments of Malaysia and Singapore have agreed to extend the deferment of the project to 31 Dec 2020, from 31 May 2020; 
  
  2. Contrary to market expectations, the RM21bil MRT3 project has not been included in the newly announced short-term National Economic Recovery Plan (Penjana);
  
  3. The tabling of the 12th Malaysia Plan (which, among others, will earmark public infrastructure projects to be implemented in 2021–2025) originally scheduled on 6 Aug 2020, has been postponed to “a later date”, while the tabling of Budget 2021 has been rescheduled to 6 Nov 2020 from 2 Oct 2020; and
  
  4. While the Chinese main contractor for the RM44bil East Coast Rail Link project has since May 2020 been dishing out subcontracts to local players, these jobs are of: (1) low value, i.e. earthworks and drainage; and (2) smallish in terms of size, i.e. ranging from only RM40mil to RM100mil.
   
• 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 weak CPO prices) and toll road (due to recurring losses at certain concessions).
• On a straight P/E basis, IJM’s valuations are unattractive at 16–26x forward earnings on muted prospects

Source: AmInvest Research - 18 Jun 2020