IJM reported 1HFY23 core PATAMI of RM149.8m meeting both our and consensus expectations at 46%. Construction orderbook stands at RM4.81bn (3.2x cover). Pipeline includes highway extension, ECRL, Indian highways, buildings and possibly MRT3. Unbilled sales stood at RM3.1bn, including land sales. Port throughput should increase sequentially. Management has affirmed that toll restructuring is NPV neutral. Marginal tweaks to forecasts. Maintain BUY rating with lower TP of RM1.88. Our base case for MRT3 is delays but no cancellation. Key catalysts include MRT3 news flow and contract wins. Risks: MRT3 cancellation, prolonged elevated materials prices and labour shortage .

Meet expectations. IJM reported 2QFY23 results with revenue of RM1.07bn (-0.1% QoQ, 22.6% YoY) and core PATAMI of RM73.4m (-4.0% QoQ, vs core LATAMI of - RM32.8m in 2QFY22). This brings 1HFY23 core PATAMI to RM149.8m (vs core LATAMI of -RM14.6m in 1HFY22). Results met our and consensus expectations at 46% of full year forecasts.

EIs. Note that we have adjusted 2QFY23 numbers for RM46.3m of forex losses. No other EIs were assumed for 2QFY23.

Dividend. DPS of 2.0 sen was declared going ex on 14-Dec-22 (1HFY23: 2 sen; 1HFY22: 17 sen).

QoQ. Core PATAMI declined slightly by -4.0% while revenue was flattish at -0.1%. Profitability weakness at infrastructure and property was largely offset by sequential improvements at construction and to a larger extent, industry. Weakness at infrastructure was mainly due to resurfacing costs at one of the Indian highways and higher interest expense while property saw weaker topline (-5.3%). Improvements at construction came from finalisation of accounts whereas industry still benefits from strong demand and positive forex effect.

YoY/YTD. On a YoY and YTD basis, performance turned profitable (vs losses in comparative periods) resulting from low base effect as 2QFY22 and 1HFY22 were impacted by various forms of work stoppages and disruptions.

Construction. Outstanding orderbook amounts to RM4.81bn (3.2x cover). IJM has so far secured RM1.1bn worth of jobs (60% stake in hospital project). Contracts secured comprise of 2 buildings, 1 hospital and 1 factory job. The company is inching closer to its RM3.0bn win target for FY23 as we understand the impending toll restructuring will yield construction opportunities in excess of RM1bn. This is pending the signing of supplemental agreement with the government. However, we do note this will be done with a different government post GE15. IJM has also submitted bids for all civil packages of the MRT3 and is working on participating in the systems package. Other project pipeline could include ECRL, highways in India and building jobs.

Property. Sales in 2QFY23 came in at RM 1.3bn which includes RM1bn worth of land sales (50:50 overseas vs local). The company is working on a couple of land parcel sales likely to come in FY24. IJM’s unbilled sales now stands at RM3.1bn. Non-land property sales however are showing signs of slowing sequentially coming down to RM300m vs ~RM400m achieved in 1QFY23 due to higher interest rates. Post the appointment of IJM Land’s new CEO, sales target has been raised from RM1.8bn to RM3.0bn for FY23 (1HFY23: RM1.7bn). We understand the remaining RM1.3bn will be achieved through sales of properties rather than land. Along with the results release, IJM also announced the acquisition of the remaining 40% stake in Bandar Rimbayu from WCE for a cash consideration of RM494m. Management is guiding for the transaction to be earnings accretive.

Industry. Segment continues to shine with topline increasing 4.0% QoQ and 23.3% YoY. This is driven by strong order wins with 847k tonnes secured in 1HFY23, keeping balance orderbook >1m tonnes. Segmental margins are also on an uptrend, increasing for 5 sequential quarters now. This is due to new orders carrying higher margins and performance is expected to sustain moving ahead with demand pulse still sustaining.

Infrastructure. Port throughout came in better at 5.7m (vs 5.3m in 1QFY23). We attribute this to decline in shipping rates helping low value cargo move. We are expecting a better 2HFY23 for throughput as shipping rates has continue falling further aided by possible 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. As for its toll segment, management has affirmed that the impending restructuring will result in a NPV neutral change to concession terms.

Forecast. We make marginal tweaks to FY23/24/25 earnings forecasts - 0.6%/3.4%/1.1% after accounting for unexpected land sales and slightly reducing construction win assumptions.

Maintain BUY, TP: RM1.88. Maintain BUY with lower TP of RM1.88 (from RM1.91) post earnings adjustments and conservatively derating construction multiple to 8x P/E (from 12x) in view of uncertainties. TP is derived based on unchanged 30% discount to SOP value of RM2.68. While there is little clarity on the new government’s approach to mega projects, our base case for the MRT3 is delays but no cancellation. Key catalysts include MRT3 news flow and contract wins. Risks: MRT3 cancellation, prolonged elevated materials prices and labour shortage.

Source: Hong Leong Investment Bank Research - 29 Nov 2022