Investment Highlights

• We maintain HOLD on IJM Corp (IJM) with a lower SOP-based fair value (FV) of RM1.79/share (previously RM1.83/share), implying an FY24F PE of 17x, near its 5-year average of 16x. There is no FV adjustment for our 3-star ESG rating.

• IJM posted 9MFY23 core net profit (CNP) of RM226mil (after adjusting for exceptional items, mainly net unrealised FX losses of RM95mil). On an annualised basis, we deem the results to be 7% below our forecast. IJM’s earnings are expected to be weak in 4QFY23 as order book replenishment was below our expectation.

• IJM has only secured RM1.4bil in 9MFY23, 47% of our assumption of RM3.0bil for FY23F. Hence, we cut our earnings by 5% for FY23F-24F to account for this.

• CNP tripled YoY to RM226mil in 9MFY23 on the back of stronger contribution from the manufacturing and quarrying and property development segments:
  • Manufacturing & quarrying segment’s core PBT (after adjusting for RM8mil gain from disposal of asset in 2QFY23) climbed 2.5x to RM108mil in 9MFY23. Revenue grew 19% to RM745mil in 9MFY23 on the back of higher deliveries of piles and ready mixed concrete.
  • Property development segment’s PBT grew 79% YoY to RM142mil in 9MFY23, underpinned by higher work progress at ongoing projects and improved profit margins of development projects.
  • Construction segment’s PBT fell 29% YoY to RM52mil in 9MFY23, in tandem with a 30% YoY contraction in its revenue to RM804mil as most projects are still in its early stages.
  • Infrastructure segment’s PBT fell 85% mainly due to poor contribution from its overseas infrastructure (mainly due to unrealised FX losses on its USD borrowings of RM76mil), whilst cushioned by its Malaysian toll-ways, which grew 4x to RM101mil.
• QoQ, CNP grew 9% to RM78mil in 3QFY23 mainly due to strong contribution from the property and infrastructure segments. This was partially offset by weaker construction and manufacturing/trading segments.

• IJM’s outstanding order book fell 4% QoQ to RM4.6bil, still representing a healthy 2.9x FY23F construction revenue. YTD replenishment for FY23 totalled RM1.4bil, with notable wins including the construction of Kapar Hospital (RM831mil) and ASEM chip assembly/testing facility (RM341mil). As replenishment made up 47% of our earlier expected wins of RM3bil, we have halved our FY23F replenishment assumptions to RM1.5bil. 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 remains at RM3.0bil, supported by 4QFY23 launches totalling RM740mil – of which RM252mil was launched in Feb 2023. So far, the group has recorded property sales of RM2.4bil (including land sales of RM1.0bil). Unbilled sales stood at RM3.4bil as at endDec 2023. In line with IJM’s guidance, we raise our property sales target to RM3.0bil from RM2.5bil previously.

• The manufacturing and quarrying division secured 1.32mil tonnes of orders in 9MFY23 (vs 1.65mil tonnes in 9MFY22), bringing outstanding order book to under 1mil tonnes. We estimate a replenishment of 1.5mil in FY23F, supported by exports and local projects.

• As traffic at IJM’s toll roads recover to pre-MCO levels, toll collection revenue grew by a strong 50% YoY to RM182mil in 9MFY23. The discussions for the toll restructuring of BESRAYA and LEKAS have been finalised. Effective from Jan 2023 onwards, Class 1 toll rates will be reduced - 7.5% for BESRAYA and 8% for LEKAS. At the same time, the concession period for both highways will be extended - 6 years for BESRAYA and 25 years for LEKAS. Meanwhile, talks for NPE and WCE are still ongoing.

• Risks to IJM include (i) eroding margins from higher-than-expected building material costs and labour shortages; and (ii) shelving of mega projects.

• We view IJM as fairly valued as it is currently trading at 15x FY24F PE, close to its 5-year average of 16x.

Source: AmInvest Research - 24 Feb 2023