Investment Highlights

• We raise our FY21–23F net profit forecasts by 47%, 12% and 12%, tweak our fair value (FV) up by 3% to RM1.12 (from RM1.09) 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 earnings upgrade is to largely reflect higher projections for IJM Plantations on better-than-expected results. Maintain UNDERWEIGHT.

• IJM Corp’s 9MFY20 core net profit of RM138.9mil (adjusted for one-off items largely forex gains) beat our expectations, coming in at 90% of our full-year forecast. Meanwhile, at 57% of the full-year consensus estimates, we consider the results within market expectations, assuming a strong 4Q. The variance against our forecast came largely from better-than-expected plantation profits (of which we have raised accordingly in our revised forecasts).

• IJM’s 9MFY20 core net profit plunged 42% YoY due to the weaker showing from property (weak billings on slow construction progress amidst various pandemic restrictions) and building materials (a slowdown in the construction sector). Flattish performance was seen at construction (as reduced billings were cushioned by a slight improvement in margins) and infrastructure (as reduced traffic at toll roads, was buffered by strong cargo throughput at the ports at 20.9mil tonnes for 9MFY21 (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, coupled with lumpy forex gains.

• During a recent analysts briefing, 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 RM5bil (only at about half 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. the Johor Bahru–Singapore Rapid Transit System (RTS) and MRT3. It acknowledged that it takes time for these sizeable projects to get off the ground, with the main hurdle being the mode of financing.

• Meanwhile, its FY21F property sales may exceed its target of RM1.0bil to RM1.2bil as It already registered RM1.1bil sales in 9MFY21. It achieved RM1.4bil sales in FY20.

• We maintain our view that the government will have very limited room for fiscal manoeuvre in 2021 given the elevated national debt, even before the pandemic. The government’s fiscal position has been weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic. All these have culminated in Fitch Ratings’ Dec 2020 downgrade of Malaysia’s long-term foreign-currency issuer default rating to ‘BBB+’ from ‘A- ‘, on the heels of S&P Global Ratings’ June 2020 downgrade of Malaysia’s outlook to negative from stable.

• Under these circumstances, we believe the government is unlikely to roll out new public infrastructure projects in a major way over the short term. Also, given the suspension of parliament following the declaration of a state of emergency until 1 Aug 2021, the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025) scheduled for March 2021 could now be put on the back burner.

• 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). However, we do see bright spots in plantation (strong CPO prices) and ports (resilient throughput despite the pandemic).

• On a straight PE basis, IJM’s valuations are unattractive at 14–26x forward earnings on muted prospects. An ROE of 4% and less is a strong indication that IJM has not realised its full earnings potential.

Source: AmInvest Research - 26 Feb 2021