News

• Swarna Tollway disposal. IJM announced that it has entered into a Share Purchase Agreement with MAIF Investments India to dispose the Swarna Tollway for a cash consideration of INR10bn (RM596.8m). Based on IJM’s effective stake of 98.5% in the tollway, its attributed proceeds would amount to RM587.8m. The expected gain on disposal is estimated at RM92.6m.

Comments

• Another cash out in India. IJM’s decision to dispose the Swarna Tollway is not surprising as management previously guided that it will continue to monetise its Indian assets should the right opportunity arise. In FY14 (Mar), IJM concluded the sale of a 36% stake in the Trichy Tollway for INR1.1bn (RM60.1m). Late last year, IJM also announced the proposed disposal of the Jaipur-Mahua Tollway for INR5.3bn (RM295m).

• Special dividend possibility? In FY14 IJM netted RM640m in cash from the disposal of several assets such as the Trichy Tollway, Kemaman Port and Kuantan Port. This resulted to a special dividend of 10 sen being declared for FY14 on top of the usual 15 sen (FY15: 15 sen). As such, we do not discount the possibility of another special dividend for FY16 given that the cash influx from the disposal of Swarna (RM588m) is almost similar to that of FY14.

• Superior orderbook cover. Following strong job wins of RM5.7bn in FY15, IJM sits on an all-time high orderbook of RM6.5bn. This implies a superior cover ratio of 6.8x on FY15 construction revenue which will propel earnings growth going forward. Work on its largest job, the West Coast Expressway (RM2.8bn) has begun and the open tender portion (RM2.2bn) will be called early next year in which IJM will be bidding for as well.

Risks

• Given its record high orderbook, execution is a risk to watch out for.
• Slower sales given the softening property market is another risk.

Forecasts

• The gain on disposal of Swarna will raise our FY16 earnings from RM648m to RM741m. However, as this would be regarded as an EI, we leave our core earnings forecast unchanged.

Rating

• Maintain BUY, TP: RM8.00
• 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 concluded privatisation of IJM Land is also expected to be EPS accretive which we estimate to be 3% for FY16.

Valuation

• Our TP of RM8.00 is based on the SOP method which implies FY16-17 P/E of 22.1x and 19.6x respectively.

Source: Hong Leong Investment Bank Research - 22 Jul 2015