News/ Comment

IJM Corp (IJMC) has proposed to privatise its 64.15% owned subsidiary IJM Land (IJML) for RM3.55/share. The estimated acquisition costs is RM1,984m (558.8m of IJML shares), which will be satisfied by the issuance of 1 IJMC share (@ RM6.70/share) for every 2 IJML share and cash consideration of RM0.20 per IJML share.

Rationale: 1) Enable IJMC with greater liberty to plan and decide on the strategic and future business direction of IJML; 2) Enhance the valuation of IJMC, in view of synergistic opportunities; 3) Enable IJML to leverage on IJMC’s balance sheet and cash-flow for further growth opportunity; and 4) Enable existing IJML shareholders to cash out partially and realise investment valuation.

Comments

IJMC is confident of securing enough votes from minority shareholders of IJML for the privatisation exercise.

Shareholder of IJML will be able to realise upfront gain of a total of 45.5sen (41 + 9/2) or 14.5% (RM0.455/RM3.14).

The whole exercise is expected to complete by early 2015, which will increase IJMC 2015 PATAMI to RM793m (from RM690m) but reduce 2015 FD-EPS to 45.0sen (from 46.6sen), after accounting for higher share base.

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.

Rating

HOLD

Positive: (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

Downgrade to Hold as share price has risen near to our Target Price of RM7.09 based on Sum-Of-Parts valuation (see Figure #1). Post the acquisition, our SOP will drop slightly to RM7.07. Furthermore, we expect near-term share price overhang from the additional IJMC share issuance.

Source:Hong Leong Investment Bank Research - 10 Jun 2014