IJM’s construction orderbook stands at RM4.5b translating to 2.3x cover. Outstanding tenderbook stands at c.RM4b consisting of domestic projects equally split between infra and building jobs. Award amounting to c.RM650- 700m external construction work from Light City, could materialise in 1QFY21. Earnings drag from WCE is expected to grow with commencement of tolling for WCE sections 5, 8, 9 & 10 as volume pickup is unlikely until the opening of the Selangor stretch. Cut FY20-22 earnings by 6-17%. Due to decline in share price post-downgrade, we upgrade to HOLD (from Sell) but with slightly lower SOP driven TP of RM1.93 (from RM1.94).

We Recently Met Up With IJM With the Following Key Takeaways:

Construction. IJM’s current construction orderbook stands at RM4.5b (buildings: 32%, infra: 11% & road: 56%) declining from RM5.1b in 2QFY20. Its outstanding tenderbook stands at c.RM4b consisting of domestic projects equally split between infra and building jobs (excluding Light City and ECRL). The Penang Light City project is undergoing finalisation of terms with JV-partner, Perennial and an award amounting to c.RM650-700m worth of external construction works could materialise in 1QFY21. Margin-wise, management is confident in maintaining construction PBT margins between 6-9% (material prices remains conducive at current levels). Dip in construction PBT margin to 5.9% in 3QFY20 was mainly due to higher finance costs in relation to the Indian highway project and is not expected to recur moving forward.

Property. Company remains on track to achieve its target of RM1.6b sales for FY20 after hitting RM1.2b for 9MFY20. Sales have been mainly driven by projects like Shah Alam 2, Seremban 2 and Rimbayu. For 1HCY20, IJM is planning to launch projects with a cumulative c.RM1.4b anchored by Rimbayu and Riana Dutamas. Separately, management revealed that the Royal Mint project in London (GDV: GBP200m) has been handed over to buyers in 4QCY19 with a take-up rate of 90%. For the property segment, PBT margins are anticipated to come in comfortably above 10% moving forward.

Kuantan port. Throughput at Kuantan Port remains healthy amid the Covid-19 outbreak. We understand from management that operations at Alliance Steel (estimated throughput 7-10m fwt p.a.) so far are unaffected. Prospects for sustained throughput growth are intact with new MCKIP investors such as Maxtrek Tyres (in land clearing phase) and NewOcean Energy (pending EIA). Recent investors like ICP and Camel Power have started operations in Aug-19 and Oct-19 respectively.

WCE. The highway remains a drag on IJM’s bottom-line as 3QFY20 saw share of associates losses of -RM27.3m bringing 9MFY20 sum to -RM73.8m (against 9MFY19: RM30.8m). The quarter saw opening of sections 5, 9 & 10 in Sept and Dec- 19 respectively, in addition to section 8 (opened on May-19) which results in interest being expensed off (previously capitalised). We gather all opened sections have commenced tolling in Jan and March-20 upon which amortisation recognition starts. Based on our understanding, opening of sections 1, 2, 3 & 6 (Selangor stretch) are slated for CY2021 where we expect pickup in overall traffic volume. In the near term, we anticipate widening loss contribution as significant volume pickup is unlikely until the opening of Selangor stretch.

Forecast. Cut FY20/21/22 earnings by 6.6/18.1/17.2% after factoring in widening losses from share of associates offset by increasing our replenishment assumptions for FY21 from RM1.0b to RM1.7b after accounting for potential wins from ECRL and Light City.

Upgrade to HOLD, TP: RM1.93. Due to decline in share price post-downgrade (- 9.8% since), we upgrade to HOLD (from Sell) but with slightly lower SOP driven TP of RM1.93 (from RM1.94) after earnings forecast adjustment and maintaining our discount at 40% on SOP value of RM3.22. Our TP implies P/E of 29.5x for FY20, 22.0x for FY21 and 18.7x for FY22.

Source: Hong Leong Investment Bank Research - 9 Mar 2020