IJM reported 1QFY23 core PATAMI of RM76.5m which met both our and consensus expectations at 22%/23% of full year forecasts. Construction orderbook is marginally lower at RM3.94bn (2.6x cover) but with MRT3 coming in, we are not concerned. Property sales were solid at RM400m, a pre pandemic norm. Port poses longer term throughput upside despite disappointing this quarter. Maintain forecast and BUY rating with unchanged TP of RM1.96. Trading at 0.64x P/B (-1SD 10 year) the stock still offers inexpensive exposure to mega projects. Key catalysts include MRT3 news flow and contract wins. Risks: prolonged elevated materials prices, election risks and labour shortage .

Met expectations. IJM reported 1QFY23 results with revenue of RM1.07bn (-13.0% QoQ, +3.7% YoY) and core PATAMI of RM76.5m (-41.9% QoQ, +319.0% YoY). Results met our and consensus expectations at 22%/23% of full year forecasts.

EIs. Note that we have adjusted 1QFY23 was adjusted for net gain of RM2.0m. 4QFY22 core PATAMI was adjusted for RM64.0m inventory impairment, RM95.6m of asset impairment, RM32.4m of receivables write-back and RM17.9m of gain on investment properties. 1QFY22 was adjusted for net gain of RM15.1m. We exclude forex impact from our analysis.

Dividend. No DPS Was Declared for the Quarter.

QoQ. Core PATAMI decreased by -41.9% falling in tandem with lower revenue (-13.0%). The quarter saw lower contribution from construction billings (finalisation of accounts in the immediate preceding quarter) and weaker showing from infrastructure divisions. From a profitability standpoint, there were lower contributions from construction, property and infrastructure divisions.

YoY. Core PATAMI increased by 319.0% with stronger contributions from its property, industry and infrastructure segments. As a result of better margin mix, blended core PATAMI margins improved by 5.4 ppts.

Construction. Outstanding orderbook amounts to RM3.94bn, translating into a 2.6x cover on FY22 construction revenue. The company has not secured anything major in 1QFY23 but with guidance for wins >RM3bn, expectations are for contract replenishment towards the backend of FY23 to be driven by MRT3. We believe the company is bidding for CMC302 and CMC303 but its chances are likely skewed towards the above ground package. We think IJM’s big balance sheet would also be an advantage in the event it ends up as a subcon (net gearing: 0.27x; shareholders’ funds: RM9.8bn). Longer term, there are potential job opportunities through self generated port expansion jobs and also highway extensions to complement its existing toll roads portfolio.

Property. Sales in 1QFY23 have been robust turning in the usual RM400m/quarter, slightly ahead of our expectations. Nonetheless, we are factoring in possible moderation moving ahead with interest rate hikes being implemented. Sales continue to be anchored by the central region contributing 73% in 1QFY23. Unbillled sales stand at a sizable RM2.2bn (1.8x cover) and the company has managed to trim unsold completed inventory to RM800m from RM1.2bn previously. Sales target for FY23 is at RM1.8bn, to be backed by RM1.4-1.5bn of new launches.

Industry. The segment exhibited strong performance with top-line surging by 52.6% YoY and 8.5% QoQ. This is driven by strong order wins with total orders in FY22 of 2.1m tonnes (+61% vs FY21). Segmental margins are also on an uptrend, increasing for 4 sequential quarters now. This is due to new orders carrying higher margins and performance is expected to sustain moving ahead.

Infrastructure. Perhaps the key disappointment to the quarterly print is the port throughput, coming in at only 5.3m tonnes. We were expecting a throughput of ~26m tonnes for FY23. The shortfall is attributed to high freight rates, global supply chain disruptions and China lockdowns. While supply chain disruption could be easing, China lockdowns remains the wildcard. The port could potentially see an additional 10m tonnes of throughput commencing in 2024-25 with new batch of investors at MCKIP. Domestic toll roads have return to pre-pandemic level contributions. Nonetheless, it’s Indian infra subsidiaries are seeing forex losses on its USD borrowings denting headline profitability (-RM33.0m). We believe talks to restructure its tolls are ongoing but would not result in IJM exiting the tolls business. As there are substantial debt payments at LEKAS coming due starting next year, we believe there would be increased urgency to restructure going forward.

Forecast. No Change as Results Are In-line.

Maintain BUY, TP: RM1.96. Maintain BUY with unchanged TP of RM1.96. TP is derived based on unchanged 30% discount to SOP value of RM2.81. Trading at 0.64x P/B (-1SD 10 year) the stock still offers an inexpensive exposure to mega projects. Key catalysts include MRT3 news flow and contract wins. Risks: prolonged elevated materials prices, election risks and labour shortage.

Source: Hong Leong Investment Bank Research - 25 Aug 2022