Investment Highlights

• We cut our FY21–22F forecasts by 9% and 6% respectively, but keep our FV relatively unchanged at RM1.26 based on “sum of parts” (SOP) (Exhibit 2), having updated our FV for IJM Plantation. Our SOP valuation values IJM’s construction business (within the SOP valuation) at 12x forward earnings, in line with our benchmark forward target P/E for large-cap construction stocks. Maintain UNDERWEIGHT.

• IJM’s FY20 core net profit of RM389.1mil (adjusted for forex losses and asset impairments, but not inventory impairments) beat our forecast and consensus estimates by 42% and 30% respectively. We believe the key variance against our forecast came from the lumpy profit recognition from its Royal Mint Gardens property project in London. However, we downgrade our earnings forecasts to reflect the lingering impact from the movement control order (MCO) and new norms.

• FY20 core net profit eased 7% YoY. Flattish performance was registered in construction (due to weak order book replenishment) and property development (lumpy profit recognition from Royal Mint Gardens in London offset by subdued property sales locally and a RM91mil impairment on property stock value).

• Meanwhile, a weaker showing was seen in infrastructure (a 27% jump in Kuantan Port’s throughput to 26mil tonnes offset by losses from its toll concession in Argentina due “inflationary adjustments and higher-than-expected credit losses on the toll compensation”) and building materials (due to the double whammy of lower deliveries and margin squeeze). Losses in plantation widened as increased forex losses negated higher production and CPO prices realised.

• IJM currently sits on a construction order book of RM4.5bil (less than half of RM9.4bil it carried two years ago during the peak of the previous construction cycle in 2018). It did not provide specific guidance on the target for new construction job wins in FY21F, other than saying that internal building works worth RM1.4bil from Phase 2 of The Light Waterfront Penang may come through over the next few months. Our forecasts assume IJM will secure RM1.5bil worth of new construction jobs annually in FY21– 23F.

• On the East Coast Rail Link (ECRL) project, IJM indicated that it has been in talks with the Chinese main contractor for potential work packages. However, it acknowledged that the Chinese main contractor appears to be more inclined to award small work packages based on job type to local players, while IJM is more interested in turnkey contracts for sections of the rail project. It also mentioned opportunities in concessions in water infrastructure and renewable energy in Malaysia and toll roads in India.

• Meanwhile, it guided for RM0.8bil to RM1bil property sales in FY21F (vs. RM1.4bil achieved in FY20). It is putting into the market in FY21F RM1.4bil worth of new launches including 2-storey link houses in Bandar Rimbayu (GDV of RM500mil; RM735K/unit on average), condominiums in Mont’Kiara, KL (GDV of RM590mil; RM600 per sq ft) and Bukit Jambul, Penang (GDV of RM224mil; RM550 per sq ft). At present, its unbilled property sales stand at RM1.1bil, down substantially from RM2bil six month ago.

• Given the still elevated national debt and reduced 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 KL-Singapore 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 ECRL 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 15–21x forward earnings on muted prospects.

Source: AmInvest Research - 29 Jun 2020