Results

• 2QFY16 results came in with revenue of RM1.44bn (+8% YoY, +8% QoQ) and core earnings of RM86m (-35% YoY, - 48% QoQ).

• For the cumulative 9M period, core earnings were flat YoY at RM390m. In deriving core earnings we have removed the gain on disposal of (i) Jaipur Mahua Tollway amounting to RM169m recorded in 1Q and (ii) Swarna Tollway at RM133m booked in 3Q.

Deviation

• 9M core earnings were below expectations at 67% of our full year forecast (58% of consensus). The culprit was the plantation division which recorded a core net loss of RM10m (see our report on IJM Plantations (IJMP) today).

Dividends

• No dividend was declared.

Highlights

• Construction waiting to take off. 9M construction revenue jumped 51% YoY as execution on its orderbook gained momentum. However PBT only grew by a meagre 3% as progress on most jobs are still at the early stage and IJM does not recognise any profit margin until completion rate on the job hits 10%. We estimate IJM’s orderbook to stand at a record RM7bn, implying a superior cover ratio of 7.8x on FY15 construction revenue.

• Property to remain challenging. The property division saw a 41% and 58% decline in revenue and PBT for the 9M period. This reflects its thinning unbilled sales which we estimate at RM1.6bn, translating to a thin cover of only 0.8x on FY15 property revenue. In view of the weak sentiment, IJM has shifted its focus towards more affordable homes.

• Lower margin for industries. For the 9M period, industries saw a 5% and 10% growth in revenue and PBT. This was driven by tonnage growth of 19% which was partially offset by lower margins for quarrying and concrete.

Risks

• Orderbook execution and soft property market.

Forecasts

• FY16-18 earnings for IJM are reduced by 14%, 6% and 3% respectively, largely due to our downward revision in target price of IJMP.

Rating

• Maintain BUY, TP: RM3.82
• We believe the key earnings catalysts for IJM are all in the right places. Earnings growth for its construction division is imminent given the sizable orderbook that it sits on. Whilst the property outlook appears weak, this is somewhat offset by the privatisation of IJM Land which should help clog the MI leakage from this year onwards.

Valuation

• Following our earnings adjustment and lower TP for IJMP (from RM3.05 to RM2.80) our SOP based TP for IJM is reduced from RM3.86 to RM3.82. This implies FY16-17 P/E of 27x and 21x respectively.

Source: Hong Leong Investment Bank Research - 26 Feb 2016