Results

• IJM reported 1QFY18 results with revenue coming in at RM1.47bn (flat QoQ, +12% YoY) and core earnings (ex. forex) of RM130m (+8% QoQ, +7% YoY).

Deviation

• 1Q core earnings made up 20% of our full year forecast (consensus: 19%) which is slightly below expectations. This largely stems from the results shortfall for plantations (high cost of production and tax).

Dividends

• None declared.

Highlights

• Decent performance for construction. The construction division saw revenue increasing 9% YoY and PBT by a higher 16% (margin expansion from 10.1% to 10.9%). YTD job wins are off to a good start with RM451m secured (FY17: RM3bn). Management is eyeing RM3bn in job wins for FY18, potentially coming from LRT3 (RM9bn), Pan Borneo Sabah (RM13bn) and East Coast Rail (RM55bn). There are also job potential from its related entities such as (i) New Deepwater Terminal Phase 2 (NDWT) (RM1bn) and (ii) The Light Phase 2 (RM1.5-2bn).
• Property better with no forex loss. The property segment saw flat revenue but PBT rising 23% YoY given the lower base last year from forex loss on the GBP. Management is seeing improving buyer sentiment but strict financing by banks remains. As such, it is targeting another year of flat sales at RM1.4bn for FY18.
• Industries hit by higher material price. Revenue for industries rose 10% YoY but PBT fell -16%. While tonnage of piles rose 5% YoY, margins were compressed by higher raw material prices.
• Volume recovery for infra. While infra revenue rose 29% YoY, PBT jumped by a larger magnitude of 211% given the low base last year. The strong recovery was due to a 73% growth in cargo which was hampered last year due to the bauxite mining ban.

Risks

• Soft property market and further extension of the bauxite mining ban (impacting Kuantan Port).

Forecasts

• We cut FY18-19 earnings by 12% and 9% respectively, largely coming from the plantations and industries division. Rating Maintain BUY, TP: RM3.97
• We like IJM as a play towards its resurrection in construction earnings, higher demand for piles and recovery in Kuantan Port’s cargo. Foreign shareholding (end July) is at a 7-year low of 28.4% (peak: 44.2% in July 2014).

Valuation

• Following the earnings cut which is partially offset by rolling our valuation horizon, our SOP based TP is reduced from RM4.13 to RM3.97. This implies FY18-19 P/E of 25.4x and 21.8x respectively.

Source: Hong Leong Investment Bank Research - 24 Aug 2017