IJM Corp; Buy; RM5.53
Fair Value: RM6.60; IJM MK

IJM has formalised the disposal of 40% of Kuantan Port Consortium Sdn Bhd (KPC) to Beibu Gulf Holding (Hong Kong) Co. Ltd, a wholly owned-subsidiary of Guangxi Beibu Gulf International Port Group Co. Ltd (Guangxi) with the signing of the definitive agreement. This is for a total consideration of RM334.4m.

The conditions precedent of the share sale agreement includes

i) a 60-year concession to KPC for the existing Kuantan Port and also for the new deep water terminal (NDWT);

ii) the successful acquisition by a joint venture company to be set up by IJM and Guangxi (at 60:40 equity participation) for the acquisition of 700 acres of industrial land located north of Kuantan Port with the assistance of the Pahang State Government. The land shall be subsequently developed by the JV;

iii) Guangxi shall take active steps to introduce investors for a steel mill, an aluminium processing plant, and an edible oil processing plant in Kuantan; and

iv) procure on best endeavour basis, a written undertaking from the government to bear the cost of dredging the NDWT. The cost of the dredging of the NDWT will be in two phases as follows:- Phase 1 to dredge up till 16 metres deep; and Phase 2 to dredge up till 18 metres deep.

KPC reported improved financial performance over the past 3 years. In FY13 (March Y/E), it made RM80m in net profit on the back of RM205m in turnover (FY12 turnover of RM175m and RM68m net profit and FY11 turnover of RM123m and RM37m). Hence, the sale works out to be one-year trailing PE of 10.5x and 3.6x shareholders funds. The expected gains on the disposal at the company level of is a total of RM301m. There will be no profit impact at the Group level but will increase the reserves positively and enhance the Group's balance sheet. The expected completion date is 2QFY15 (Y/E March) or 3QCY14.

We are positive on the sale as IJM’s aggressive expansion plans would mean stronger and more revenue streams, and a pipeline of new construction orders. IJM is looking to invest RM2bn to build a new deepwater terminal to berth vessels up to 200,000 DWT. Construction is expected to start in 1Q14 and completed in 24 months, and would double capacity to 52m freight tonnes of cargo. Phase 1 construction work is expected to be worth RM1.5-RM2bn. The proceeds from the disposal of 40% stake would be used to fund the construction, together with other internal funding.

We maintain our BUY rating and SOP-derived TP of RM6.60 for IJM. The next big catalyst for the stock is the West Coast Expressway where the completion of financial close in October will pave the way for the formal award of contracts.

Source: HwangDBS Research - 10 Sep 2013