Investment Highlights

• We maintain HOLD on IJM Corp (IJM) with an unchanged SOP-based fair value (FV) of RM1.83/share, implying an FY24F PE of 16x at parity to its 5-year mean. There is no FV adjustment for our 3-star ESG rating.

• IJM’s 1HFY23 core net profit (CNP) of RM145mil (after adjusting for exceptional items, mainly net unrealised FX losses of RM91mil) was within expectations as it accounted for 51% of our FY23F earnings and 46% of consensus. Hence, we maintain our FY23F-25F earnings. IJM also declared DPS of 2 sen/share, which makes up 33% of our full year forecast.

• IJM returned to black in 1HFY23 from a loss of RM13mil in 1HFY22 on the back of stronger contribution from all divisions:
  • Infrastructure segment’s core PBT (after adjusting for net unrealised FX losses from USD borrowings of RM68mil in 1HFY23 and RM3mil in 1HFY22) rocketed 8.4x YoY to RM54mil in 1HFY23 from RM7mil in 1HFY22 mainly due to stronger contribution from Malaysian tollways.
  • Property development segment’s core PBT (after adjusting for unrealised FX losses of RM29mil in 1HFY23 and RM7mil in 1HFY22) expanded 3.7x YoY to RM92mil in 1HFY23 due to higher work progress at ongoing projects.
  • Manufacturing & quarrying segment’s core PBT (after adjusting for RM8mil gain from disposal of asset in 2QFY23) escalated 2.9x YoY to RM82mil in 1HFY23 as revenue grew by 36% YoY on the back of higher deliveries of piles and ready-mixed concrete and improved gross profit margins.
  • Construction segment’s PBT improved by 11% YoY to RM44mil in 1HFY23 due to higher profit margins recognised upon completion of projects. However, the division’s revenue decreased by 26% YoY to RM536.9mil, attributed to lower progress billings of projects which are in early stages.
• QoQ, IJM’s CNP fell 6% to RM72mil in 2QFY23 on weaker contribution from property segment and infrastructure. The drop was partly cushioned by higher contribution from construction and manufacturing/quarrying segments.

• IJM’s outstanding order book rose 23% QoQ to RM4.8bil, representing a healthy 3x FY23F construction revenue. YTD replenishments for FY23F totalled RM1.4bil with notable wins including the construction of Kapar Hospital (RM831mil) and ASEM chip assembly/testing facility (RM341mil). Our forecasts remain unchanged as YTD contract awards are within our FY23F order book replenishment assumptions of RM3bil. Further replenishments may come from domestic projects such as Mass Rapid Transit 3, East Coast Rail Link, extension of toll road (part of the toll way restructuring) and development of industrial buildings, as well as Indian highway projects.

• IJM’s internal target for FY23F property sales is RM3.0bil (+67% compared to RM1.8bil previously), supported by RM623mil upcoming launches. So far, the group has recorded property sales of RM1.7bil (comprising land sales of RM1bil). Unbilled sales stood at RM3.1bil as at end-Sep 2022. We raise our FY23F sales target for the property division to RM2.5bil from RM1.5bil previously, which is lower than IJM’s internal target as we believe consumer sentiments would remain weak due to potential OPR hikes in Malaysia. On ongoing asset monetisation efforts, IJM is envisaged to dispose up to RM1bil worth of assets which could include land in London and the Malaysia-China Kuantan Industrial Park (MCKIP), as well as a 30-acre land in Rimbayu industrial land in Selangor to J&T Express. All of these are expected to be recognised in FY23F-24F.

• Additionally, IJM has proposed to acquire the remaining 40% equity stake in Radiant Pillar, the developer of Bandar Rimbayu development in Klang Valley for a total cash consideration of RM494mil from WCE Holdings. With an estimated balance GDV of RM8bil, it is one of the most prominent township developments in the area.

• The manufacturing and quarrying division secured 847k tonnes of orders in 1HFY23 (vs 2.2mil tonnes for FY22), bringing the current outstanding order book to above 1mil tonnes. We estimate a replenishment of 1.5mil in FY23F, supported by exports and local projects. Management affirmed that the increase in raw material costs can be passed on to customers through higher selling prices.

• Traffic at IJM’s toll roads has recovered to pre-MCO levels as reflected in the stronger toll collection revenue of RM119mil in 1HFY23 (+2x YoY). The previous government had approached IJM to restructure its toll concessions. The discussions for BESRAYA and LEKAS have been finalised while still ongoing for NPE and WCE. IJM will still own the expressways and does not expect any impairments as concessions’ NPVs are expected to remain the same post-restructuring.

• Meanwhile, Kuantan Port achieved a throughput of 5.7mil tonnes in 2QFY23 and 11mil tonnes in 1HFY23, making up 46% of our FY23F assumption of 24mil tonnes. We remain cautious on the outlook for FY23F due to the macroeconomic headwinds and geopolitical tensions.

• IJM has fully sold MCKIP1 & MCKIP2 (RM400mil-500mil). Previously in Jul 2022, IJM saw the entry of new major investors to MCKIP, which will contribute up to 10mil tonnes of additional cargo throughput for Kuantan Port in FY24F-25F, subject to approvals from regulators. IJM, via its 60%-owned Asas Panorama has also entered into a 49:51 JV with China Harbour Engineering Company for the development of Malaysia-China Kuantan International Logistics Park (MCKILP), an integrated mixed development and logistics hub on a 640-acre land in MCKIP3.

• 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.

• We view IJM as fairly valued as it is currently trading at a reasonable 14.3x FY24F PE vs its 5-year historical average of 16x.

Source: AmInvest Research - 29 Nov 2022