Results

• IJM reported 2QFY18 results with revenue at RM1.59bn (+9% QoQ, +7% YoY) and core earnings (ex. forex) of RM111m (-14% QoQ, -24% YoY). This brings cumulative 1HFY18 core earnings to RM241m, declining 10% YoY.

Deviation

• 1H core earnings formed 43% of our full year forecast and 37% of consensus which is below expectations. The weaker than expected results was due to the plantation segment which experienced dry weather (lower FFB) along with higher replanting and wages for the Malaysia operations.

Dividends

• Declared interim DPS of 3 sen (unchanged YoY).

Highlights

• Decent performance for construction. The construction division saw revenue and PBT increasing 14% and 11% YoY for 1HFY18. Job wins have totalled RM2.5bn thus far into FY18 with its orderbook now at a high of RM9.4bn (4.5x cover on FY16 construction revenue). Management guides that it could potentially reap margins above its usual 6-9% target (PBT level) for its recent 3 building jobs as they were secured on a design and build basis. It also shared the possibility of winning another contract by year end.

• Property does better. Although 1H property revenue was flat YoY, PBT rose by 12% thanks to better margin. 1H sales totalled RM770m and management feels that it can surpass its FY17 level of FM1.4bn for FY18. Sales was largely driven by townships and landed – Rimbayu, Shah Alam 2 and Seremban 2. Unbilled sales currently stand at RM2bn (1.7x cover). On its recent move to develop and own Menara Prudential (RM500m) in TRX, management shared that 84% of the tenants have been secured and is targeting a net yield of slightly above 6%.

• Key ECRL play. We continue to view IJM as a key play to the ECRL (RM55bn). Management feels there is a good chance that it can undertake the construction works for the stretch that passes through its 60% owned Kuantan Port (2 stations) as it would be logistically easier to manage. The ECRL is also expected to spur demand for its spun piles as quite a number of stretches will be elevated.

Risks

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

Forecasts

• We cut FY18 earnings by 3% due to the forecast reduction for IJM Plantations but leave FY19-20 unchanged.

Rating

Maintain BUY, TP: RM3.97

• We like IJM as a play towards its resurrection in construction earnings driven by its record high orderbook. Foreign shareholding (end Oct) is now at a 6-year low of 27.9% (vs its peak of 45% in June 2014).

Valuation

• Maintain SOP based TP of RM3.97 which implies FY18-19 P/E of 26.2x and 21.8x respectively.

Source: Hong Leong Investment Bank Research - 29 Nov 2017