News

IJM has proposed to dispose its 39% stake in Konsortium Pelabuhan Kemaman S/B (KPK) and surrounding land measuring 2.87m sq m to Eastern Pacific Industrial Corporation Bhd (EPIC) for a total cash consideration of RM240m (see Figure #1 for details). The expected gain from the proposed disposal is ~RM123m (9 sen/share).

The proposed disposal is conditional upon EPIC obtaining approval from the Economic Planning Unit and is expected to be completed within 3 months with a further extension period of 1 month.

Comments

Unlocking Kemaman… As highlighted in our report “Outlook to outshine soft results” dated 29 May-13, the sale of KPK was within our expectation. The investment in KPK has matured and with little asset enhancement initiative left, IJM has decided to dispose KPK to unlock its value. The sale of RM240m translates to 17 sen/share for IJM. The proceeds raised will allow IJM to redeploy its capital and resources to grow Kuantan Port (refer to our report “Bringing China to Kuantan Port” dated 6 Feb-13).

Offer looks decent… Based on FY12 numbers, both ports posted PAT of RM5.4m, hence EPIC’s offer translates to a P/E of 14.4x, which is comparable to Bintulu Port and NCB Holdings’ P/E of ~20x and ~15x respectively. KPK’s concession will expire in 2066. Meanwhile, the surrounding land sale works out to RM5.5 sq/ft (see Figure #1 for details). We are POSITIVE on the offered valuation.

Financial impact… The loss of future contribution from KPK is immaterial, as it works out to 1.3% of FY13’s core earnings. All else equal, the cash proceed of RM240m will improve IJM’s net debt of RM3.3bn to RM3.1bn. Hence, net gearing ratio will improve from 61% to 57%.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; Unexpected downturn in the construction, property and plantation cycle; and Sharp fluctuation in forex.

Forecasts

Unchanged as KPK’s earnings contribution is relatively immaterial.

Rating

BUY

Positive: (1) Higher upwards price sensitivity towards new contract wins; (2) Strategic shareholding in WCE and Kuantan Port to clinch its projects; (3) Recovery in construction margin; (4) Robust contribution from IJM Land; (5) FFB growth to mitigate weak CPO prices.

Negatives: (1) Delays in securing sizable contracts; (2) Continued deterioration in CPO prices; (3) Slower than expected take-up rates for its property launches. Valuation

Maintain Target Price of RM6.33 based on SOP valuation

Source: Hong Leong Investment Bank Research - 03 Jun 2013