IJM received an offer from KLK for the disposal of its 56% stake in IJMP for an offer price of RM3.10 or RM1.5bn. The acquisition value is deemed attractive at 19% premium to our house TP of RM2.61 for IJMP. There could be a special dividend yielding 11% (based on 50% payout) on top of 2% normal dividend. Post-sale, IJM could record RM728m disposal gain and reduced earnings profile volatility, longer term. Maintain forecast pending completion. Maintain BUY with higher TP of RM2.29 after recalibrating our SOP calculations. Key catalysts include MRT3, 12MP and potential asset monetisation.

NEWSBREAK

Long awaited catalyst. IJM Corp has received an offer from KLK for the proposed acquisition of its 56% stake in IJMP for a cash consideration of RM1.5bn or RM3.10/share translating to a 26% premium over last closing price. Conditions precedent for the transaction include: (1) shareholders’ approval of both IJM and KLK; (2) consent from lenders of IJM and IJMP and (3) consent from relevant authorities.

HLIB’S VIEW

Positive development. We are positive on the monetisation of its IJMP stake given that the market’s consistent undervaluation. Offer price of RM3.10/share (i.e. RM1.5bn) constitutes roughly 22% of IJM’s market capitalisation. We reckon this could result in a special dividend of 21 sen on top of FY22f dividend of 3.8 sen, translating to a total yield of 13.1%. Note that we are assuming a 50% pay-out ratio on the sale proceeds. Nonetheless, it is possible for IJM to pay out the proceeds over 2-3 years, in our view. Post-transaction, IJM may also see its SOP “conglomerate discount” narrow with the reduction of operating divisions.

Reasonably attractive. At the offer price of RM3.10, IJMP is valued at a fair EV/ha of RM54k/ha, higher than its offer price to acquire part of TSH’s plantation land in East Kalimantan in 2020 at EV/ha of RM47k. The offer price is also at 19% premium to our house TP of RM2.61, derived based on 18x FY22 EPS.

Financial implications. With this transaction, we estimate IJM would record a RM728m one off gain on disposal while net gearing could reduce from 0.43x to 0.39x by our estimates. The deconsolidation of IJMP would reduce IJM’s FY22-23f earnings by -17/-10% (assuming 50% of cash proceeds are reinvested at c.4%). However, we note that this is mainly driven by higher assumptions of CPO prices of late. We note that in the past, IJMP has been a volatile drag on IJM’s core earnings. This is an opportunistic sale on the part of management leveraging on favourable CPO prices. Going forward post-sale, IJM’s earnings profile would be more stable with the exclusion of its plantation business.

Forecast. We make no changes pending the completion of the sale.

Maintain BUY, TP: RM2.29. Maintain BUY with higher SOP driven TP of RM2.29 (from RM2.11) having factored in a higher value for IJMP of RM3.10 (from RM2.61) and removing our 30% SOP discount tagged to IJMP. Thus, our TP of RM2.29 is derived based on 30% discount to SOP value of RM2.67 plus IJMP at offer price (RM0.42 per IJM share). Key catalysts include MRT3, 12MP and further asset monetisation.

Source: Hong Leong Investment Bank Research - 10 Jun 2021