Results

• IJM reported 3QFY18 revenue of RM1.56bn (-2% QoQ, -2% YoY) and core earnings of RM106m (-5% QoQ, -21% YoY). This brings cumulative 9MFY18 core earnings to RM347m, declining 14% YoY.

Deviation

• 9M core earnings formed 63% of our full year forecast and 57% of consensus which is below expectations.

• The weaker than expected results was due to the plantation segment which saw lower FFB production for Malaysia along with higher cost of production, finance and taxation. Apart from that, orderbook execution for construction was slower than expected.

Dividends

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

Highlights

• Construction not as fast as expected. The construction division saw revenue and PBT increasing 6% and 8% YoY for 9MFY18. However, this growth was lower than expected. Job wins have totalled RM2.5bn thus far into FY18 with its orderbook still at a near high of RM9.1bn (4.3x cover on FY17 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 are on a design and build basis.

• 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.

• Forex squeezes property margin. While property revenue rose 6% YoY, PBT declined by 7% for 9MFY18 due to forex loss as opposed to gains in the previous year. Unbilled sales of RM1.9bn imply a cover of 1.6x on FY17 property revenue.

Risks

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

Forecasts

• We cut FY18-20 earnings by 8-9% as a result of (i) reduction in earnings forecast for IJMP and (ii) scaling back construction orderbook recognition.

Rating

Maintain BUY, TP: RM3.49

• We like IJM as a play towards its resurrection in construction earnings driven by its record high orderbook. Foreign shareholding (end Jan) is remains at a 6-year low of 27.2% (vs its peak of 45% in June 2014).

Valuation

• SOP based TP is reduced from RM3.97 to RM3.49 after the earnings cut, TP reduction for IJMP and applying a 10% discount. This implies FY18-19 P/E of 25.4x and 21x respectively.

Source: Hong Leong Investment Bank Research - 28 Feb 2018