Investment Highlights

• We cut our FY19-20F forecasts by 14% and 20%, reduce our FV by 48% to RM1.85 (from RM3.54) and downgrade our recommendation to HOLD from BUY. Our revised FV is based on 12x FY20F EPS (from SOP previously), in line with our reduced benchmark forward PE of 11-13x for large-cap construction stocks (from 14-16x previously).

• Amidst the uncertain outlook for IJM Corp’s key divisions, i.e. construction (due to the review of mega projects by the government), property (due to the prolonged sector slowdown) and infrastructure (due to the potential abolishment of highway tolls), we believe that the market will derive greater comfort by valuing IJM in its entirety based on its near-term earnings potential, i.e. PE (vs. a combination of PE, RNAV and DCF — this accords more generous valuations to long-term assets such as landbank and concessions that may not be realisable under the current environment).

• IJM’s FY18 core net profit of RM425.7mil (adjusted for, among others, impairment loss on its stake in Scomi) missed our forecast and consensus estimates by 14% and 19% respectively. We believe the culprits came largely from weaker-than-expected property, plantation and building material profits.

• FY18 core net profit eased 16% YoY. Higher profits from construction (backed by a record order backlog), infrastructure (driven by a 14% increase in cargo throughput at the ports), were offset by weaker performance from property (due to reduced margins and forex losses), plantation (due to higher-than-expected replanting and harvesting costs and forex losses) and manufacturing (hurt by increases in input costs and a product mix for piles that was skewed towards low-margin small-diameter ones).

• IJM is still confident about achieving RM2bil new construction job wins in FY19F (Mar). It is currently bidding for “3-4 building jobs” locally and it plans to pursue more projects in India. Internally, The Light City integrated project (part of Phase 2 of The Light Waterfront Penang) currently developed by a JV between IJM and Singapore-based developer Perennial Real Estate, could also generate some RM1.5-2.0bil construction works for IJM.

• IJM secured RM4bil worth of new jobs in FY18 and it currently sits on a record construction order book of RM9.4bil. We have cut our FY19-20F construction order book replenishment assumption to RM2bil annually (from RM3bil).

Source: AmInvest Research - 31 May 2018