FY18 core earnings of RM354m (-32% YoY) were below our expectations and consensus. The disappointment came from associate loss from Scomi, lower than expected construction margin and unusually high effective tax rate. While contract flows should slow down, we take comfort in its all-time high orderbook of RM9.4bn (4x cover ratio). Property sales ended higher at RM1.6bn for FY18 and this is targeted to sustain for FY19. Cut FY19-20 earnings by 12% and 14%. Maintain BUY with lower SOP TP of RM2.23 (from RM3.49).

Below expectations. IJM reported 4QFY18 results with revenue of RM1.4bn (-11% QoQ, -5% YoY) and core earnings of only RM6m (-94% QoQ, -95% YoY). This brings FY18 core earnings to RM354m, down 32% YoY. The disappointing results were due to (i) associate losses from Scomi amounting to RM48m, (ii) lower than expected construction margin and (iii) unusually high effective tax rate at 55.9%. A 2nd interim dividend of 3 sen was declared, bringing the full year sum to 6 sen (FY17: 7.5 sen).

Flattish delivery despite high orderbook. Construction revenue and PBT grew 8% and 4% YoY for FY18. This flattish growth is rather surprising considering its all-time high orderbook of RM9.4bn (4x cover on FY18 construction revenue). Given the administration change post GE14, contract flows are likely to slow down as they are reviewed (i.e. delayed) or scrapped. In view of this, management fells there is risk to its RM2bn orderbook replenishment target for FY19. To help mitigate the slower domestic contract flow scene, IJM is eyeing on more jobs in India. However, for its existing ongoing jobs (i.e. LRT3 tunnelling and West Coast Expressway), management sees little risk of cancellation.

Better showing for property sales. FY18 property sales amounted to RM1.6bn (FY17: RM1.4bn), underpinned mainly by townships (Rimbayu, Shah Alam 2 and Seremban 2). For FY19, management aims to sustain sales YoY (i.e. at RM1.6bn). Unbilled sales stands at RM2bn, translating to a healthy cover of 1.6x FY18 property revenue.

Lower for industries. The industries division saw FY18 revenue fall by 7% YoY and PBT by a much larger magnitude of 42%. All key products (piles, quarry and RMC) saw lower sales volume while FY18 PBT margin was compressed (12.6% to 7.8%) due to higher material cost.

Forecast. We cut FY19-20 earnings by 12% and 14% respectively on back of lower orderbook replenishment and slower industries volume, reflecting the potential overall slowdown in the construction sector stemming from project reviews.

Maintain BUY, TP: RM2.23. Apart from the earnings cut, we also widen our SOP discount from 10% to 40% to reflect (i) the overall slowdown in contract flows and (ii) uncertainty with regards to the new administration’s policy on toll concessions. Effectively, our TP is reduced from RM3.49 to RM2.23, implying FY19-20 P/E of 15.2x and 14.1x respectively.

Source: Hong Leong Investment Bank Research - 31 May 2018