IJM reported 9MFY20 earnings of RM197m (-32% YoY) which were below our and consensus expectations. IJM’s outstanding construction orderbook stands at RM4.6bn, translating into a depleting 2.3x cover ratio. Cut FY20/21/22 earnings forecast by 19.2%/9.2%/2.5%. Downgrade to SELL with lower SOP driven TP of RM1.94 (from RM2.22) after earnings adjustment and increasing our SOP discount to 40% (from 30%) on SOP value of RM3.23 to reflect muted tender prospects due to potential delays of project rollout in light of recent political landscape changes. The stock looks expensive trading at FY20 P/E of 29.6x (above 2SD). Our TP implies P/E of 26.7x for FY20, 17.9x for FY21 and 15.6x for FY22.

Below expectations. IJM reported 3QFY20 results with revenue of RM1.44bn (-9% QoQ, -4% YoY) and core PATAMI of RM48m (+7% QoQ, -24% YoY). This brings 9MFY20 core PATAMI to RM197m, decreasing by 32% YoY. The core earnings accounted for 60% of our full year forecast (consensus: 49%) falling short of expectations. The earnings shortfall was mainly due to weaker industrial and construction margins. Core PATAMI has been adjusted for: i) RM34m of forex gains and ii) RM32m derivative losses. No dividends were declared during the quarter.

Dividend. No dividends were declared for the quarter (9MFY20: 2 sen, 9MFY19: 2 sen).

QoQ. Core PATAMI increased by 7% due to higher contribution from property and plantation divisions.

YoY/ YTD. YoY and YTD core PATAMI declined by 24% and 32% due to weaker performance in all divisions except plantation compounded by increase in minority interests resulting from recovery in plantation segment.

Construction. YTD construction profit declined by 4% despite a similar increase in construction revenue due to lower PBT margin declining by 0.6ppts to 6.7%. IJM’s outstanding construction orderbook stands at RM4.6bn, translating into a depleting 2.3x cover on FY19 construction revenue.

Property. Higher YTD profit from property segment (+11% YoY) was largely driven by higher revenue contribution (+9% YoY) due to higher work progress achieved on current projects. Unbilled sales stand unchanged at RM1.9bn, translating into a rather thin cover of 1.3x on FY19 property revenue.

Industries. Profit YTD from industries division recorded a decent growth of 5% buoyed by improved margins by its piles and ready-mixed concrete sectors which saw PBT margin expand by 0.5ppts to 7.1%.

Infrastructure. YTD revenue and PBT of the infrastructure division increased by 17% and 11% respectively YoY mainly due to expansion of cargo throughput handled by increasing by 40% YoY. Going forward we expect the performance of the segment would be anchored by continued growth of cargo throughput handled due to expansion of MCKIP.

Forecast. Cut FY20/21/22 earnings forecast by 19.2%/9.2%/2.5% after factoring in weaker construction and industrial margins and assuming no orderbook replenishment for FY20.

Source: Hong Leong Investment Bank Research - 26 Feb 2020