We hosted a meeting with IJM Corp and came away with the following key takeaways. While the operating capacity at its construction sites and property galleries are almost back in full force probably since early Sept-21 as its workers’ vaccination rate is currently at >90%, the supply chain disruption of building materials is expected to last through 2QFY22 hampering the rate of recovery. We continue to believe FY22 to be a back-loaded year with meaningful earnings recovery only taking place in 2HFY22. We also gather that job replenishment rate could be tepid, highly dependent on the timing of roll-out of the mega infrastructure projects. The divestment of IJMP has been completed as announced on 6 Sept-21 and has ceased to be a subsidiary of the group from Sept-21 onwards which we have previously factored in our earnings forecasts. We understand that the indicative special dividend of 15sen/share could be announced in 2QFY22 in one tranche. All in, we maintain our Neutral call with an unchanged SOP TP of RM2.00.

• Supply chain disruption remains a near-term risk. While we are positive with the group’s workers vaccination rate at >90%, allowing workforce capacity to resume close to pre-pandemic level in early Sept- 21, the current supply chain constraints could impede the rate of progress, hence slowing down the progress billings. The bottleneck arises as it takes some time for suppliers to ramp up the manufacturing process at a time where demand starts coming back on stream at a faster pace. We gather that this is expected to last through 2QFY22 before normalising potentially in 2HFY22.

• Orderbook replenishment to be flattish. Management maintains its target of RM2bn new job wins in FY22 while we retain our conservative assumption of RM1.5bn (similar to FY21: RM1.5bn) given the potential slower roll-out/ uncertainties of mega infrastructure projects. This is mainly due to the government’s strained coffers, lack of sizeable private sector jobs and increased competition at the moment. YTD, the group has received RM586m or 40% of our assumption. We reckon that any upside to our assumption would be coming from clinching further larger portion of the ECRL project (e.g. ECRL spur line to its Kuantan Port) and implementation of mega public infra projects, awaiting further developments from 12th Malaysia Plan and Budget 2022.

• Balance sheet strengthened. The c.7 months of earnings void upon divestment of its IJMP as at end Aug-21 is partially offset by an increase in interest income in which we have imputed in our forecast. The cash proceeds of RM1.5bn could also help to lower the group’s net gearing from 0.4x as of 30-Jun-21 to c.0.22x, enabling it to further strengthen its balance sheet to better compete in an environment of PFI-driven landscape moving forward, in our view.

• Property division could be a bright spot…. The management is hopeful that the group could probably achieve a similar property sales trajectory in FY21 (RM1.7bn) for FY22. This is primarily premised on the extension of home-ownership campaign (HOC) until end of the year. We posit that the group’s property division will continue to benefit from HOC via higher property sales especially its landed residential units given the work-from-home trend as it spurs customers to seek a more spacious and quality home. Recall that IJM’s property segment managed to achieved a sales of RM700m in 1QFY22, representing c.40% of total FY21 sales.

• …and underpinned by the RM1.1bn worth of launches during Apr-Aug 2021 and RM540m worth of launches to be taking place between 3QCY21 to 1QCY22 which are mostly landed properties. As a result, we are of the view that 2QFY22 property sales could be underwhelmed due to the lock-down and construction halt, before rebounding on a pent-up demand in subsequent quarters as all the sales galleries have been resumed since early Sept-21. For example, the group has recently launched Phase 2D of its Sierra Hijauan development in Ukay Perdana, Ampang on 13 Sept-21 with a GDV of RM567m.

• Outlook. As of 30-Jun-21, the group has a total outstanding orderbook of c.RM4bn (a healthy c.2.0x cover of its FY21 construction revenue) which could provide earnings visibility for the next 2-3 years. Domestic job replenishment prospects remain dim given the uncertainties on mega projects roll-out, awaiting updates from 12th Malaysia Plan and Budget 2022. Meanwhile, we are comforted by the promising vaccination rate as it allows higher worker capacity (80-100%), and hence progress billing could be gradually pick up albeit supply chain disruption remains a near term dampener on earnings recovery. On the other hand, the industry division has seen solid demand coming from the export market and could be out-performing in FY22 as compared to FY21. In addition, we opine that the reactivation of MRT3 could be a re-rating catalyst for the group as one of the potential major beneficiaries.

Source: PublicInvest Research - 22 Sept 2021