Investment Highlights

• We raise our FY21–23F net profit forecasts by 5%, 1% and 1%, tweak our fair value (FV) up by 2% to RM1.09 (from 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. The changes in our forecasts and FV are to reflect the slight upgrade in our projections and FV for IJM Plantations. Maintain UNDERWEIGHT.
• IJM Corp’s 1HFY20 core net profit of RM39.5mil (adjusted for one-off items largely forex gains) came in at 27% and 17% of our full-year forecast and the full-year consensus respectively. We consider the results within our expectations (assuming a stronger 2H as the pandemic eases) but below market expectations (as the gap could be too wide to bridge even with a stronger 2H).
• IJM’s 1HFY20 core net profit plunged 79% YoY due to weaker showing from construction (operational restrictions and supply-chain disruptions), property (less visits to sales galleries by potential buyers) and building materials (reduced construction activities). The performance of the infrastructure division was mixed as the reduced traffic at toll roads was cushioned by strong cargo throughput at the ports at 13.9mil tonnes in 1HFY21 (vs. 26mil tonnes achieved for full-year FY20) thanks to sustained imports of scrap and exports of finished steel products by a foreign-owned steel mill, as well as outbound shipments of bauxite and sand. Meanwhile, the plantation unit benefited from higher production and selling prices realised.
• IJM reiterated its guidance for RM2bil construction job wins annually. YTD (FY21), it has secured RM1.5bil worth of new construction jobs while its outstanding construction order book now stands at RM5.4bil (only at about 60% of RM9.4bil it carried two years ago during the peak of the previous construction cycle in 2018). Our forecasts assume IJM will secure RM1.5bil worth of new construction jobs annually in FY21–23F.
• IJM said that it is “positioning” for mega projects earmarked for implementation under Budget 2021, i.e. Johor Bahru–Singapore Rapid Transit System (RTS), MRT3 and KL-Singapore high-speed rail (HSR). It acknowledged that it takes time for these sizeable projects to get off the ground, with the main hurdle being the mode of financing.
• On the East Coast Rail Link (ECRL) project, IJM reiterated that it is still in talks with the Chinese main contractor for potential work packages (which ideally should be worth about RM1bil). 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.
• Meanwhile, it sees revived interest from property buyers (but it is concerned about the travelling restrictions introduced recently that could hurt sales again). It guided for RM1.0bil to RM1.2bil property sales in FY21F (vs. RM1.4bil achieved in FY20). It already registered RM720mil sales in 1HFY21. At present, its unbilled property sales stand at RM1.2bil while its inventory stays slightly below RM1bil.
• 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 HSR. 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) and toll road (due to recurring losses at certain concessions). Nevertheless, we do see bright spots in plantation (strong CPO prices) and ports (resilient throughput despite the pandemic).
• On a straight P/E basis, IJM’s valuations are unattractive at 16–37x forward earnings on muted prospects. An ROE of less than 4% is a strong indication that IJM has not realised its full earnings potential.

Source: AmInvest Research - 26 Nov 2020