• IJM’s 2Q17 results were within our expectation but below consensus estimates – accounting for 45% and 38% respectively

• Revenue increased 11.1% yoy but core net profit declined by 10% yoy due to higher tax rate of 26.5%

• We expect improved contributions from construction, plantation and industrial segment division going forward to ramp up overall earnings

• Maintain Buy with a TP of RM3.89

Results within expectation. IJM’s 2QFY17 results came in within our expectation but below consensus estimates making up 45% and 38% respectively. We expect earnings to catch up in the remaining 2 quarters i.e. 3Q17 and 4Q16 – driven by increased contribution from construction, plantation and industrial segment.

Trending up. Revenue for 2Q17 improved by 11% yoy to RM1.5bn mainly due to higher revenue contribution from the Group’s construction, industrial and plantation divisions. However, core earnings declined by 10% yoy mainly due to higher tax rate of 26.5% (+5.3ppt) as certain expenses were not deductible for tax. On qoq comparison, both revenue and core earnings rose by 13.2% and 21.2% respectively, due improved contribution from the 3 segments mentioned earlier.

Dividend. IJM has declared a first interim dividend of 3sen. We project a total of 7sen dividend to be declared for the current financial year.

Major segmental review. The revenue and pre-tax profit for the construction segment increased by 54.7% and 40.1% yoy to RM557.2m and RM58.5m respectively on the back of solid construction orderbook of around RM8bn. Its construction projects are currently shifting into higher gear of execution. As for the property segment, revenue slid by 5.3% yoy to RM269.5m inline with the soft property market. The segment’s pre-tax profit declined by 61.5% yoy. Gross profit margin was impacted a result of a shift in product mix with a higher focus on affordable properties and increased incentives being offered to buyers. Meanwhile, the revenue for the plantation segment surged by 38.7% yoy to RM201.4m mainly due to higher average palm product selling price (please refer to our IJM Plantation report for details).

Huge construction orderbook but overall earnings will be on moderate growth. IJM’s orderbook is around RM8bn, inclusive of the MRT Line 2 – package V203, which can provides for earnings visibility over the next 2-3 years. The recovery in the plantation division this year is also a focus for management, as this would strengthen further the Group’s earnings. Nevertheless, given the weak property market that has resulted in lower sales volume, slower construction and billings progress, as well as margins erosion, we expect IJM’s earnings growth as a whole to be moderate.

Property segment remain weak but recognition is expected to sustain. We reckon that IJM’s property division to remain challenging due to uncertainties in the global and local economic prospects as well as continued stringent mortgage approvals and incoming supply of completed properties. Nevertheless, with unbilled sales of about RM1.7bn, this division is expected to sustain in the current financial year.

Earnings to catch up in the upcoming quarters hence we maintain our earnings forecast and valuation. We expect FY17 earnings to catch up in the remaining 2 quarters i.e. 3Q17 and 4Q16, which will lift overall earnings. This is expected to be driven by increased contribution from construction, plantation and industrial segment. Therefore, we make no changes to our FY17 and FY18 earnings projection. Maintain BUY rating for IJM with a new target price of RM3.89 based on FY18 earnings.

Source: BIMB Securities Research - 29 Nov 2016