Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and fair value of RM1.26 based on “sum of parts” (SOP) (Exhibit 2), valuing 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.

• IJM has been awarded by IJM Perennial Development Sdn Bhd (IJM Perennial) a RM864.7mil contract for the construction of an 11-storey retail mall and convention centre in The Light City, George Town, Penang. IJM Perennial, a 50:50 JV between IJM and Singapore-based Perennial Real Estate Holdings Ltd, is the master developer of The Light City (or Phase 2 of The Light Waterfront Penang) which will also comprise hotels, condominiums and office towers (see Exhibit 1 for the master plan of The Light Waterfront Penang).

• The latest contract is the first major job IJM has secured in FY21F (March), boosting its outstanding construction order book to RM5.4bil that should sustain IJM for another 2–3 years based on its churn rate of RM1.5–2.0bil annually. There is no change to our forecasts that assume IJM will secure RM1.5bil worth of new construction jobs annually in FY21–23F.

• While we are positive on the latest development, it has not come as a surprise to us. During an analyst briefing in endJune 2020, while IJM refrained from providing specific guidance on the target for new construction job wins in FY21F, it did indicate that this project may come through “over the next few months”.

• We maintain our view that given the still elevated national debt, 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, such as the MRT3 and the KL–Singapore high-speed rail.

• Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.

Source: AmInvest Research - 12 Aug 2020