IJM’s earnings should recover in the coming quarters with stronger performance expected from most segments. Longer term prospects for its construction segment remains hinged on accommodative Budget 2021 and 12MP. Notable near term job prospects include remainder of Light City and ECRL. Construction order book stands at RM5.5b, a decent 2.7x cover. Property sales target of RM800m-RM1b looks achievable with recent healthy demand seen. Port operations looks to be resilient with growth thesis still intact. Cut FY21-22 earnings by 6%. Maintain BUY with lower TP of RM1.66. With earnings likely to have bottomed, we see attractive risk reward for the stock as it currently trades at near post-GFC low P/B of 0.51x.

We Met With Management Recently With the Following Key Takeaways:

Resilient port. IJM’s Kuantan port managed to register 6.2m fwt of throughput during 1QFY21, representing an estimated -4.6% decline. While the MCO did impact operations for 2 weeks, recovery was swift. According to management, July was a record month for the port, in part we think due to backlog resulting from the MCO. Throughput volumes are likely to sustain as bulk cargo have shown similar resilience in previous recessions. Additionally, with EIA approvals slated by end-CY20 for a MCKIP investor, annual throughput may rise by c.3m fwt. We believe long term thesis for the port remains intact with healthy FDIs into MCKIP (land sale) driving throughput growth.

Recovering tolls. Generally, traffic for its domestic tolls has recovered to 80-90% of pre-MCO levels with complete normalisation on track for year end. We believe concerns over public transportation use due to Covid-19 has somewhat contributed to a rebound in traffic flows. Google data seems to indicate steeper traffic decline in public transportation hubs (-29% vs. pre-MCO) than retail/recreation (-11%) and workplaces (-12%) suggesting possible traffic spill over to roads. On the flip side, things are substantially bleaker for its Indian toll roads where volumes are minimal as Covid-19 cases continue to escalate.

Property. IJM is targeting sales of RM800m-RM1bn in FY21 having achieved RM320m in 1QFY21. Launch target remains unchanged at RM1.2bn and RM200m for CY20 and CY21 respectively. Dominating these launches are Starling, Rimbayu (GDV: RM500m; launch date: 2QCY20), Riana Dutamas Parcel 2 (GDV: RM590m; launch date: 4QCY20) and The Terraces, Penang (GDV: RM224m; launch date: 2QCY21). We reckon its sales target is achievable given that things on the ground are improving with buyers trickling into showrooms (buoyed by HOC and all time low interest rates). Case in point, IJM’s recent launches at Rimbayu has seen strong demand. Nevertheless, we do anticipate a potential drop off in sales momentum upon expiry of the blanket loan moratorium in end Sept-2020.

Construction. IJM’s outstanding order book stands at RM5.5b, 2.7x cover on FY20 construction revenue. Tender book hovers around c.RM4b which is unchanged from early this year as award outcome has been slow to materialise, we think due to confluence of pandemic and political uncertainties. Building jobs form the majority of its tender book as DE disbursement has been slow. In the immediate term, management aims to secure the remaining c.RM500m job from Light City project by FY21. Domestically, IJM is also working on various PFI proposals to the government as well as direct discussions with CCCC for the ECRL. We understand that ECRL progress is still slow but we expect IJM to eventually secure works for the project given its strategic positioning along the ECRL corridor. Meanwhile in India, construction of Solapur-Bijapur highway has achieved construction milestone of 40%. Nonetheless, resumption of works has been gradual largely plagued by labour issues resulting from lockdown induced reverse migration.

Industry. Compared to other segments, management sounded a lot more cautious here. Orderbook levels can sustain for the next 5 months (historically similar). However, deliveries have been slow in tandem with slower offtake. We reckon things will remain challenging as broad construction normalisation is slow with some sites still not resuming (funding and labour issues) further hampered by lower operating productivity levels post-Covid-19.

Forecast. Cut FY21-22 earnings by -5.8% and -5.5% respectively after downward adjustments to our property sales assumptions (lower end of guidance) and contract replenishments for FY22f.

Maintain BUY, TP: RM1.66. Maintain BUY with lower SOP driven TP of RM1.66 (from RM1.77) after earnings forecast adjustment and updating for market values for its listed entities. TP is derived based on 40% discount to SOP value of RM2.77. With earnings likely to have bottomed, we see attractive risk reward for the stock as it currently trades at near post-GFC low P/B of 0.51x.

Source: Hong Leong Investment Bank Research - 22 Sept 2020