News

Following the MOU entered between IJM and Guangxi Beibu Gulf International Port Group Co. Ltd. (Guangxi) earlier this year (kindly refer to our report “Bringing China to Kuantan Port” dated 6 Feb-13), the 40% stake acquisition of Kuantan Port by the latter has been formalised for RM334.4m. Once all the relevant approvals have been obtained, the deal is expected to be concluded by 3QCY14.

Highlights

Higher offer… The finalised offer for Kuantan Port’s 40% stake by Guangxi is 7.9% higher than the previous offer of RM310m. Nonetheless, we believe that the higher revised offer is still cheap as it translates to a P/E of 10.5x (based on Kuantan Port’s FY13 PAT of RM79.8m). However, we believe that the potential benefits from this partnership will be rewarding. Recall, that the Chinese party will help IJM realise the full potential of Kuantan Port by bringing in new clients.

Construction opportunities… The first benefit will be the potential construction projects for the expansion of Kuantan Port worth RM1.5bn-RM2bn. It will be a timely boost for its external outstanding order book which is slowly dwindling. As of 1QFY14, its external order book stood at RM1.7bn, translating to 0.86x FY13’s construction revenue. We expect orders from Kuantan Port to materialise by 1HCY14.

Lower profits for time extension… Despite lower contribution from Kuantan Port going forward, the tenure of the concession which was supposed to end in 2027 will now be extended by another 60 years to at least 2072. Hence, potentially boosting IJM’s overall valuation.

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, pending conclusion of the deal.

Rating

BUY

Positive:

(1) Higher upwards price sensitivity towards new contract wins;

(2) Strategic shareholding in WCE and Kuantan Port to clinch 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 takeup rates for its property launches.

Valuation

TP maintained at RM6.32 based on SOP valuation (see Figure #1).

Source: Hong Leong Investment Bank Research - 10 Sep 2013