We see improving fundamentals at its port and construction segments while industry remains strong. To the contrary, its property operations could face selective sales weakness moving forward. We believe changes to toll concession terms would be DCF neutral and could bring stake unlocking & alignment extension opportunities. IJM is in the running for MRT3 contracts to augment its RM4.6bn orderbook. Despite lingering disruption to its port, longer term prospects are positive. Tweak FY23/24/25 forecasts by -5.4%/-4.4%/-3.1%. Maintain BUY rating with TP of RM1.91. Trading at 0.56x P/B (-2SD 10 year range) the stock offers inexpensive exposure to MRT3. Our base case assumes no significant changes in policies post GE. Key catalysts include MRT3 news flow and contract wins.

We Hosted a Meeting With IJM Recently With the Following Key Takeaways:

Tolls restructuring. Days after the dissolution of parliament, caretaker PM announced toll rate cuts across six highways comprising Prolintas’s four highways AKLEH, GCE, LKSA, and SILK effective 20 Oct while cuts for IJM’s two highways, BESRAYA and LEKAS will be effective from 1 Jan 2023. It is worth noting Prolintas’s portfolio saw cuts ranging between 8-15%. Assuming a 15% cut implemented on IJM’s aforementioned assets would dent our FY23/24/25 core PATAMI forecasts by - 1.3%/-4.3%/-4.2% (keeping ADT volumes fixed). Nonetheless, given an increasing reliance on PPP to fund future infra capex, socialising private sector returns may be self-defeating. In our view, changes to concession terms are likely DCF neutral involving either pay-outs or extensions. We gather that while only BESRAYA AND LEKAS were mentioned, IJM’s toll restructuring involves its entire portfolio divided into two phases categorised by operational status. We reckon the restructuring may involve partial stake monetisation of assets which we currently value at RM0.50/share and could bring opportunities of alignment extensions to enhance the viability of its toll roads.

Port: Don’t miss the forest for the trees. In the near term, port throughput volumes continue to be hampered by disruptions in China and previously high shipping rates (coming off) which would likely result in still weak 2QFY23 volumes, in our view (1QFY23: 5.3m fwt). Nevertheless, 2HFY23 could come in slightly better as falling shipping rates improves the economics of lower value cargo further aided by slight uptick in mining shipments. Volumes aside, the port is due for a tariff hike this year (no quantum shared). In the past year, Malaysia has seen tariff hikes of 30% and 15% at Pasir Gudang Port and Port of Tanjung Pelepas respectively. We have not factored this in as prevailing economic uncertainties could often lead to implementation delays. On a longer term basis, prospects are solid with MCKIP 1 and 2 fully taken up and MCKIP 3 (640 acres) undergoing approval process for further developments. Buoyed by expansion of Alliance Steel (+2.9x), investments from Jianhui Paper and Bosai Group (USD2.5bn), IJM is targeting a throughput of 35m fwt in three years (vs peak of 26.8m fwt in FY20). As such, the company is in the midst of contemplating on a containerised vs bulk cargo design for Phase 2.

Construction, a waiting game. There are no changes to IJM’s target of RM3.0bn job wins in FY23. Target is easily surpassed if tenders for the upcoming MRT3 are successful. IJM remains tight-lipped on specifics but did mention that the alleged systems consortium would meet MRT Corp’s tender prerequisites (source). Based on our compilation, total value of systems packages awarded for MRT2 amounted to ~RM4.6bn. Elsewhere, there are several tenders outstanding that could add to its RM4.6bn orderbook but amount is likely miniscule by comparison.

Property. Demand weakness from rate hikes and inflationary spill overs have translated to relative weakness in Penang and Johor markets while there is sustained interest in other regions. IJM started FY23 with RM1.8bn sales target but we believe this may have to be adjusted downwards given rising headwinds. Its 1QFY23 sales of RM400m are also behind pace. We maintain our conservative sales assumptions of RM1.4bn for FY23.

Industry. The segment is slated to be IJM’s star performer for FY23. Strength in export markets has increased the export ratio to 29% vs 10-20% previously. Some of the notable export markets are SG, Myanmar and Indonesia. The segment is now benefitting from high orderbook levels and positive currency effect.

Forecast. Tweak FY23/24/25 forecasts by -5.4%/-4.4%/-3.1% after adjusting for higher interest expense and reducing property margin assumptions. No changes made to toll earnings pending clarity.

Maintain BUY, TP: RM1.91. Maintain BUY with lower TP of RM1.91 (from RM1.96) post earnings adjustments and changes to risk free rates. TP is derived based on unchanged 30% discount to SOP value of RM2.77. Trading at 0.56x P/B (~ -2SD 10Y) the stock offers an inexpensive exposure to MRT3. Our base case assumes no significant changes in policies post GE. Key catalysts include MRT3 news flow and contract wins. Risks: significant change in policies post GE, prolonged elevated materials prices and labour shortage.

Source: Hong Leong Investment Bank Research - 8 Nov 2022