Investment Highlights

• We maintain HOLD on IJM Corp (IJM) with a lower SOP-based fair value (FV) of RM1.83/share (vs. RM1.87/share previously), implying an FY24F PE of 16x. There is no FV adjustment for ESG based on our 3-star rating.

• IJM’s 1QFY23 core net profit (CNP) of RM76mil (after adjusting for exceptional items, mainly net FX losses of RM45mil) was below our expectations but within street estimates. It accounted for 18% of our FY23F forecasts and 22% of consensus.

• The deviation from our forecast came largely from weaker contribution from the construction segment. The key variance was lower recognition of revenue and margins as most projects are still in the early stages of construction.

• As such, we reduce the earnings for FY23F by 29%, FY24F by 18% and FY25 by 9%. Apart from a more conservative assumption for revenue recognition of outstanding order book, we have also revised downwards our throughput assumption for Kuantan Port.

• IJM’s CNP rose 4.2x YoY to RM76mil in 1QFY23 from RM18mil in 1QFY22 mainly due to the stronger contribution from the manufacturing/quarrying and infrastructure divisions as follows:

• Manufacturing & quarrying segment’s PBT soared 3.9x to RM31mil in 1QFY23 from RM8mil in 1QFY22. Revenue rose 53% YoY to RM249mil in 1QFY23 on the back of higher deliveries of piles and ready-mixed concretes.

• Infrastructure segment’s core PBT (after adjusting for net unrealised FX losses from USD borrowings of RM33mil in 1QFY23 and RM2mil in 1QFY22) surged 2.6x to RM36mil in 1QFY23 from RM14mil in 1QFY22 due to stronger contribution from Malaysian tollways.

• This was partly offset by the construction PBT drop of 35% YoY to RM20mil in 1QFY23 as revenue decreased by 29%. Progress billings declined as several projects had been completed in the previous financial year.

• QoQ, IJM’s CNP fell 41% to RM76mil in 1QFY23 on weaker contribution from construction. The drop in construction earnings was partly cushioned by higher contribution from the property and manufacturing/quarrying segments.

• The group’s outstanding construction order book of RM3.9bil currently represents 2.3x FY23F construction revenue. Out of these, 71% is building jobs, 25% roads, and 4% infrastructure contracts. IJM aims to improve this with its FY23F internal job win target of RM3bil.

• Although IJM did not secure any contracts this quarter, we maintain our FY23F construction order book replenishment target at RM3bil. We think that potential replenishments will come from hospital jobs and the CMC301 or CMC302 of the MRT3 and the ECRL projects. Replenishments may also come from the toll road segment as the restructuring of tollways is expected to include an extension of one of the highways.

• IJM said that labour costs were unchanged QoQ. Looking forward, we expect labour shortages to ease as more foreign workers arrive in Malaysia. Meanwhile, steel prices have slid 9% from the peak in Apr/May 2022.

• IJM’s FY23F internal target for property sales is RM1.8bil, supported by RM1.4bil–RM1.5bil worth of new launches. So far, IJM has recorded property sales of RM0.4bil. We have assumed a modest FY23F sales target of RM1.5bil. We believe that consumer sentiment is weak due to potential OPR hikes in Malaysia.

• On the ongoing asset monetisation efforts, IJM is envisaged to gain proceeds of up to RM1bil from the sale of land in Royal Mint Gardens (London), Malaysia China Kuantan Industrial Park (MCKIP) and Rimbayu Industrial Land (Selangor) in FY23F–FY24F. So far, IJM has sold a 30-acre land in Rimbayu Industrial Land to J&T Express. Meanwhile, IJM’s manufacturing/quarrying segment’s outstanding order book is slightly above 1mil tonnes.

• Traffic at IJM’s toll roads has recovered to pre-MCO levels as reflected in the stronger toll collection revenue (+85% YoY) of RM61mil in 1QFY23 against RM33mil in 1QFY22. PBT was also higher at RM33mil in 1QFY23 against RM2mil in 1QFY22. While IJM intends to grow the toll business, the government has approached IJM to restructure its toll concessions (NPE, BESRAYA, and LEKAS). Discussions are at the tail end and IJM is currently awaiting the final decision from the government.

• Meanwhile, Kuantan Port achieved a throughput of 5.3mil tonnes in 1QFY23, making up 20% of our assumption of 27mil tonnes. We are cautious on the outlook for FY23F due to the ongoing disruptions in supply chains and macroeconomic headwinds. As such, we lower our throughput assumption to 24mil tonnes to account for softer trade volumes.

• In July 2022, IJM saw the entry of new major investors to MCKIP with combined investments of about RM14bil. The investors will contribute up to 10mil tonnes of additional cargo throughput for Kuantan Port in FY24F–FY25F, subject to approvals from regulators. IJM has also entered into a JV with China Harbour Engineering Company for the development of Malaysia-China Kuantan International Logistics Park (MCKILP), an integrated mixed development and logistic hub in Kuantan.

• Challenges faced by IJM include: (i) eroding profit margins from rising building material costs and labour shortages; and (ii) delays/cost revisions of mega projects.

• IJM is currently trading at 16x FY24F PE, which is higher than our 14x benchmark PE for large-cap construction stocks. We view the stock as fairly valued with a limited upside of 5% based on our SOP-based FV.

Source: AmInvest Research - 25 Aug 2022