IJM reported 1HFY20 earnings of RM149m (-34% YoY) which were below our and consensus expectations. YoY core PATAMI declined by 51% due share of associates slipping into losses of RM63m. IJM’s outstanding construction orderbook stands at RM5.1bn, translating into a decent 2.6x cover on FY19 construction revenue. Cut FY20/21/22 earnings forecast by 16.2%/3.9%/3.7%. Downgrade to HOLD with lower SOP driven TP of RM2.22 (from RM2.87) after earnings forecast adjustment and increasing our SOP discount to 30% (from 10%) on SOP value of RM3.17 to reflect weaker construction orderbook replenishment prospects and uncertainty for WCE’s toll collection schedule. Our TP implies P/E of 24.7x for FY20, 18.6x for FY21 and 17.3x for FY22.

Below expectations. IJM reported 2QFY20 results with revenue of RM1.57bn (+2% QoQ, +20% YoY) and core earnings of RM45m (-57% QoQ, -51% YoY). This brings 1HFY20 core earnings to RM149m, decreasing by 34% YoY. The core earnings accounted for 38% of our full year forecast (consensus: 34%) falling short of our and consensus expectations largely due to associate losses and misses on plantations. Dividend of 2 sen per share was declared during the quarter.

QoQ. Core PATAMI declined by 57% due to lower contribution from all segments except industry division.

YoY/ YTD. YoY and YTD core PATAMI declined by 51% and 34% due to share of associates slipping into losses of RM63m (against share of profits of RM24m and RM31m in 2QFY19 and 1HFY19 respectively). The reversal of fortunes for its associate is mainly due to the recognition of interest expense for completed sections of the West Coast Expressway. We understand that sections 8, 9 and 10 are completed and opened for traffic.

Construction. YTD construction profit remained flat despite a 5% increase in construction revenue due to lower construction margin declining by 0.3ppts. IJM’s outstanding construction orderbook stands at RM5.1bn, translating into a decent 2.6x cover on FY19 construction revenue.

Property. Higher YTD profit from property segment (+24% YoY) was largely driven by higher revenue contribution (+42% YoY). Unbilled sales currently stand at RM1.9bn, translating into a decent cover of 1.3x on FY19 property revenue.

Industries. Profit YTD from industries division recorded a healthy growth of 13% buoyed by improved margins by its piles and ready-mixed concrete sectors which saw PBT margin expand by 0.7ppts.

Infrastructure. YTD revenue and PBT of the infrastructure division increased by 21% and 139% respectively YoY mainly due to expansion of cargo throughput handled by increasing by 59% YoY. Going forward we expect the performance of the segment would be driven by continued expansion of cargo throughput handled after lifting of bauxite moratorium in April-19 and expansion of MCKIP.

Forecast. Cut FY20/21/22 earnings forecast by 16.2%/3.9%/3.7% after factoring in weaker performance from associates.

Downgrade to HOLD, TP: RM2.22. Downgrade to HOLD with lower SOP driven TP of RM2.22 (from RM2.87) after earnings forecast adjustment and increasing our SOP discount to 30% (from 10%) on SOP value of RM3.17 to reflect weaker construction orderbook replenishment prospects and uncertainty for WCE’s toll collection schedule. Our TP implies P/E of 24.7x for FY20, 18.6x for FY21 and 17.3x for FY22.

Source: Hong Leong Investment Bank Research - 3 Dec 2019