News

IJM’s ~25% associate, Kumpulan Europlus (KEURO), has finally received written confirmation from the Government of Malaysia that West Coast Expressway (WCE) has complied with all precedent conditions in respect of the Concession Agreement (CA) and can commence work for the Project. The effective date of the CA is on 20 Dec-13.

Comments

About the highway… The development of WCE spans 233km from Banting, Selangor to Taiping, Perak. The highway will also be connected to existing highways i.e. KESAS, SKVE and ELITE. WCE is 80% owned by KEURO (25%-owned associate of IJM) while IJM owns the balance 20% (effective stake of ~40%). WCE is expected to cost RM6bn and will take 5 years to be constructed. The concession period is 50 years and if the agreed targeted IRR is not achieved, it will be extended for another 10 years.

Construction benefits the most… The estimated construction cost for WCE is circa RM5bn. IJM, by virtue of its strategic stake in both KEURO and WCE is expected to clinch a significant portion of the construction works whereby we are expecting IJM to secure a contract value of RM3.5bn.

Sizable contract… If successful, this will be a sizable replenishment for its outstanding external order book of RM1.72bn (as of 1HFY14) and represents 2.2x FY13’s construction revenue. More importantly, it will sustain the construction division’s PBT margin recovery which had been languishing between 1-3% historically.

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 the potential works from WCE is already part of our order book replenishment assumption.

Rating

BUY

Positives: (1) Higher upwards price sensitivity towards new contract wins; (2) Strategic shareholding in WCE and Kuantan Port to help 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 take-up rates for its property launches.

Valuation

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

Source: Hong Leong Investment Bank Research - 24 Dec 2013