9MFY19 core earnings of RM290m (-17% YoY) were below both our and consensus expectations. The disappointment was mainly due to lower than contribution from plantation segment and higher than expected finance costs. The company is currently aiming for Klang Valley Double Track Phase 2 proje ct (RM5bn) and several hospital jobs that are expected to be dished out in the near term. LRT3 underground tunnel package is under finalization and we understand that value of new work package is expected to reduce by RM400m. We cut FY19-21 earnings by 16.5%, 7.7% and 4.8% respectively after adjusting downwards earnings from plantation segment and imputing higher finance costs. Downgrade to HOLD with lower SOP-derived TP of RM1.97 (from RM1.98) following earnings cut and strong performance of share price YTD.

Below expectations. IJM reported 3QFY19 results with revenue of RM1.5bn (+15% QoQ, -4% YoY) and core earnings of RM64m (-31% QoQ, -40% YoY). This brings 9MFY19 core earnings to RM290m, down 17% YoY. 9M core earnings accounted for 64% and 66% of HLIB and consensus full year forecast respectively.

Deviations. Results were below expectations mainly due to lower contribution from plantation segment and higher than expected finance costs.

QoQ. Core PATAMI decreased by 31% mainly due to higher tax expenses.

YoY. Core PATAMI decreased by 40% mainly due to weaker revenue contribution from construction, industry and plantation divisions.

YTD. Core PATAMI decreased by 40% mainly due to weaker performance from construction and industry divisions.

Construction. IJM’s outstanding orderbook currently stands at RM8.4bn, translating to a healthy cover ratio of 3.7x FY18 construction revenue. The company is currently aiming for Klang Valley Double Track Phase 2 project (RM5bn) and several hospital jobs that are expected to be dished out in the near term. LRT3 underground tunnel package is under finalization and we understand that value of new work package is expected to reduce by RM400m.

Property. IJM Land’s unbilled sales currently stand at RM2.2bn which translates into 2x cover on FY18 property revenue. Sales as at 9M has hit RM1.2bn and sales target of RM1.6bn is maintained for FY19. Sales are mainly underpinned by township and landed developments, namely Bandar Rimbayu, Shah Alam 2 and Seremban 2.

Forecast. We cut FY19-21 earnings by 16.5%, 7.7% and 4.8% respectively after adjusting downwards earnings from plantation segment and impute higher finance costs.

Downgrade to HOLD, TP: RM1.97. Downgrade to HOLD with lower SOP-derived TP of RM1.97 (from RM1.98) following earnings cut. Strong performance of share price (YTD: 25%) which resulted in limited upside also prompts us to downgrade our rating on the stock. Our TP is derived based on 40% discount on SOP value of RM3.28. Our TP implies P/E of 19.0x for FY19, 15.0x for FY20 and 15.0x for FY21.

Source: Hong Leong Investment Bank Research - 27 Feb 2019