News

• Kuantan Deep Water Terminal. IJM announced that it has been awarded the contract for the New Deep Water Terminal (Phase 1) at Kuantan Port worth RM1.2bn. The project was awarded by Kuantan Port Consortium, a 62% subsidiary of IJM. Construction period is for 36 months (completion in 1Q18).

Comments

• Profit recognition. Although the contract was awarded by its 62% subsidiary, IJM will still be able to book in profits from the construction of the new terminal. This is because the project will be treated as a concession, whereby profits on construction can be booked in.

• Job wins at an all-time high. Including this recent contract, we estimate IJM’s FY03/15 job wins at a record RM5.7bn. This sum includes the West Coast Expressway (RM2.8bn). Assuming a burn rate of RM250m in 3QFY03/15, we estimate its orderbook to stand at RM6.7bn. This translates to a strong cover of 3.9x on FY14 construction revenue, providing a good degree of earnings visibility.

Risks

• Given the sudden rise in its orderbook, execution is a risk to watch out for.

Forecasts

• Our coverage suspension on IJM has recently been lifted following the completion of an independent advisory role for its acquisition of IJM Land (which has been approved).
• We reintroduce our FY15-17 earnings projection of RM544m, RM705m and RM775m for IJM.
• 3QFY15 results are due to be out today after market close.

Rating

BUY TP: RM7.92

• We like IJM as a large cap proxy to the construction space. After many lull years for its construction division, things are set to stage a strong rebound following its record high orderbook in place. The privatisation of IJM Land is also expected to be EPS accretive which we estimate to be 3% for FY16.

Valuation

• TP of RM7.92 is based on the SOP method implying FY15 P/E of 21.8x but a much more palatable 16.8x on FY16 earnings once its key drivers starts to set in.
• A cheaper entry to IJM will be via IJM Land which will be privatised by the former involving: (i) 1 IJM share for every 2 IJM Land shares held; and (ii) RM0.22/ IJM Land share cash repayment. At the current share price of IJM Land (RM3.68), the effective entry price into IJM will be RM6.92, a 2.5% discount to its last close.

Source: Hong Leong Investment Bank Research - 27 Feb 2015