Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and fair value of RM1.06 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.

• IJM has been awarded by IJM Perennial Development Sdn Bhd (IJM Perennial) a RM314.8mil contract for the construction of a 34-storey hotel and office tower 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) comprising hotels, condominiums and office towers (see Exhibit 1 for the master plan of The Light Waterfront Penang).

• This is the second key contract IJM has secured from the development. Recall, IJM was awarded a RM864.7mil contract for the construction of an 11-storey retail mall and convention centre in Aug 2020.

• The latest contract has boosted IJM’s YTD (FY21F) new jobs secured to RM1.2bil, 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.

• 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 in 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 16–40x forward earnings on muted prospects.

Source: AmInvest Research - 25 Nov 2020