IJM announced that it has been terminated as the works package contractor for the underground package of the LRT3 from Bandar Utama to Johan Setia. Preliminary works have commenced before the project was suspended in June 2018 and IJM is currently consulting its advisers and will seek appropriate legal redress under the contract. This termination comes as a surprise to us as we expected IJM to retain the contract with different scope of works and lower costs. We understand that IJM is going to engaging with MRCB-Gkent JV (PDP) first and to decide on the next course of action accordingly. Maintain forecast as we did not factor in contribution of the underground package in our earnings forecast. Maintain BUY with unchanged SOP-driven TP of RM2.96 based on 10% discount on SOP value of RM3.28.

NEWSBREAK

LRT3 underground package terminated. IJM announced that it has been terminated as the works package contractor for the underground package of the LRT3 from Bandar Utama to Johan Setia. Preliminary works have commenced before the project was suspended in June 2018 and IJM is currently consulting its advisers and will seek appropriate legal redress under the contract. To recap, the package was awarded to IJM at a contract sum of c.RM1.1bn on March 2018. After changing of federal government post GE14, LRT3 project costs has been rationalized and part of the measure is cancellation of 2km underground tunnel which is the package that was awarded to IJM.

HLIB’s VIEW

A negative surprise. This termination announcement comes to a surprise to us as we expected IJM to retain the contract with different scope of works and lower costs. We understand that IJM is going to engaging with MRCB-Gkent JV (PDP) first and to decide on the next course of action accordingly. After stripping off of underground package contract value, IJM’s outstanding orderbook stands at c.RM6.7bn, still a healthy cover ratio of 3.4x to FY19 construction revenue.

MRT2 underground package as precedent? Using Gamuda’s MRT2 underground package as a precedent (in which the terminated contract was eventually reinstated), it is possible that this termination may not be the final outcome. Nonetheless, it is still too early to speculate on any eventual outcome at this juncture.

Forecast. Maintain forecast as we did not factor in contribution of the underground package in our earnings forecast previously.

Maintain BUY, TP: RM2.96. Maintain BUY with unchanged SOP-driven TP of RM2.96 based on 10% discount on SOP value of RM3.28. We expect short-term sentiment to be affected by this negative news but we deem any significant weakness in share price to be a good opportunity for accumulation as we did not factor in contribution from the package previously. Moreover, we like IJM as direct beneficiary of the ECRL via construction contracts and the positive spill over effect to Kuantan Port (60% stake) and MCKIP (20% stake).

Source: Hong Leong Investment Bank Research - 10 Jul 2019