IJM Corp’s 1QFY18 results were below expectations. We were surprised by the weak plantation, property and manufacturing earnings. Core net profit increased 19-20% qoq and yoy to RM131m. The infrastructure division was the star performer in 1QFY18 with PBT up more than 2-fold to RM65m. But the recent seizing of bauxite stockpiles will reduce cargo throughput for its port operations in 2HFY18. We reiterate our HOLD call with a reduced RNAV-based target price (TP) of RM3.70.

Below Expectations

IJM’s net profit of RM126m in 1QFY18 comprised only 19-20% of consensus and our previous FY18E net profit of RM671m and RM641m respectively. Weak plantation, property and manufacturing earnings were partly offset by strong infrastructure earnings. Revenue increased 12% yoy to RM1.47bn, driven by higher revenue for all divisions. PBT grew 13% yoy in 1HFY18 due to better operating performance, despite the absence of one-off gains (RM12m in 1HFY17). Slower net profit growth of 9% yoy due to higher tax rate and minorities.

Higher Port and Construction Earnings

Higher PBT for infrastructure (+211%), property (+23%) and construction (+16%) divisions offset the impact of lower PBT for manufacturing (-16%) and plantation (-36%) divisions in 1QFY18. The jump in cargo throughput by 73% yoy to 5,114k FWT lifted port earnings. Property earnings were higher mainly due to an unrealized forex gain. Construction earnings were lifted by contribution from RM3bn new contracts secured in FY18.

Cut in Earnings

Plantation revenue was lifted by higher CPO prices and sales volume in 1QFY18. But PBT fell 36% yoy due to higher production costs, negative forex and derivative impacts. We cut our EPS forecasts by 2% in FY17-19E to reflect the lower plantation earnings.

Still a HOLD

Prospects to replenish its high order book of RM8.7bn is good as it will bid for the LRT Line 3, East Coast Rail Link and Klang Valley building projects. But prospects for its other divisions are challenging due to industry-specific reasons. We reduce our RNAV-based TP to RM3.70 from RM3.75 to reflect the lower plantation and other investment valuations.

Infrastructure, Manufacturing and Property Challenges

We expect earnings to be lower for its infrastructure division in 2HFY17 due to an expected drop in port cargo throughput due to the seizing of bauxite stockpiles recently. Higher raw material costs and lower ready-mixed concrete volumes adversely affected manufacturing earnings despite higher delivered tonnage of piles (-4.9% yoy) and quarry products (-17.4% yoy). Outlook for its property development division remains challenging on the back of weak consumer sentiment, stringent mortgage approval and incoming supply of new launches and competing properties. But high unbilled sales of RM1.7bn coupled with new launches in strategic locations should sustain its earnings.

Risks

Key risks to our call: stronger/weaker-than-expected property sales and stronger/weak-than-expected plantation production.

Source: Affin Hwang Research - 24 Aug 2017