Investment Highlights

• We cut our FY21–23F net profit forecasts by 52%, 16% and 16% respectively, lower our fair value by 16% to RM1.06 (from RM1.26) based on “sum of parts” (SOP) (Exhibit 2). This 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 disappointed gravely in 1QFY20 with a core net loss of RM87.9mil (adjusted for one-off items largely forex gains) vs. our full-year net profit forecast of RM307.7mil and the full-year consensus net profit of RM276.8mil respectively. We believe the variance against our forecast came largely from a high overhead structure across the group, making many of its units unprofitable amidst a steep decline in sales.

• We have factored in lower margins across the board over our forecast period as we believe it takes time for its top line (particularly, in the property, tolled road and building material divisions) to recover to the pre-pandemic levels.

• IJM reported a core net loss of RM87.9mil in 1QFY20 as mentioned, deteriorating sharply from a core net profit of RM101.1mil during the same period a year ago. With activities coming to almost a complete halt in Apr–May 2020 at the height of the pandemic, construction profits plunged 60% YoY while other units were in the red including property, building material and infrastructure (port’s revenues were stable but toll collection was hit). The only bright spot was plantation which turned around with a PBT of RM115.3mil (including RM91.7mi forex gains; but it was hit by lumpy tax below the PBT line) vs. a small loss a year ago, driven by higher production and CPO prices realised.

• IJM currently sits on a construction order book of RM5.5bil (only at about 60% of RM9.4bil it carried two years ago during the peak of the previous construction cycle in 2018). During a recent analyst briefing, it refrained from providing guidance for new construction job wins in FY21F. However, it did subsequently bag a RM864.7mil contract for the construction of a retail mall and convention centre in The Light City, George Town, Penang. Our forecasts assume IJM will secure RM1.5bil worth of new construction jobs annually in FY21–23F

• 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.

• 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 the volatile CPO prices) and toll road (due to recurring losses at certain concessions).

• On a straight P/E basis, IJM’s valuations are unattractive at 12–30x forward earnings on muted prospects.

Source: AmInvest Research - 27 Aug 2020