IJM is scheduled to start operating the Kuantan Port New Deep Water Terminal (NDWT) Phase 1A in September 2018 and Phase 1B in June 2019. Phase 1 will increase the port’s capacity by 50% to 39m t p.a. and drive long-term growth. However, higher interest expense and depreciation will likely lead to port earnings declining 35% yoy in FY19E. We cut FY19-21E EPS by 6-8% to reflect lower port and plantation earnings. Maintain BUY with a reduced TP of RM2.48, based on 10% discount to RNAV.

Expanding Port Operation

Alliance Steel has started commissioning its RM5.6bn new plant in Malaysia-China Kuantan Industrial Park (MCKIP) to produce up to 3.5m t p.a. of long steel products. The starting up of a dedicated berth at NDWT Phase 1A to provide port facilities to the plant will ease the import of raw material and export of steel products. The development of MCKIP will support the increase in capacity for NDWT with Phase 1B and eventually Phase 2, which will double the cargo handling capacity of Kuantan Port.

Ongoing Review of Projects Creates Uncertainty

The ongoing review of infrastructure projects by the government has led to some uncertainties in the order book replenishment prospects of IJM. However, IJM is in a good position to weather the cyclical domestic construction downturn given its diversified construction expertise, competitiveness and geographical diversification. It is bidding for 3 building projects in Klang Valley and is targeting to secure at lease RM1bn worth of new contracts in FY19E. Remaining order book of RM9.4bn, equivalent to 4x FY18 construction revenue, will sustain its construction earning growth.

Cut in Earnings

We cut our EPS by 6-8% in FY19-21E to reflect lower plantation and port earnings. We reduced IJM Plantation’s earnings forecasts recently to reflect lower production growth, slower decline in production costs as well as higher effective tax rate assumption.

Reiterate BUY

We reduce our RNAV/share estimate to RM2.75 from RM2.82 previously to reflect lower valuation for its plantation division. This is partly offset by higher valuation for its port given stronger long-term FCF after factoring higher cargo throughput growth. Based on the same 10% discount to RNAV, we cut our TP to RM2.48 from RM2.54. BUY.

Facing Challenges on a Few Fronts

IJM is facing challenges for its construction, concrete product manufacturing, property and plantation operations. The ongoing review of infrastructure projects by the government will slow down the roll out of new public-sector construction contracts. However, we believe IJM will thrive under the new regime as the new Works Minister says future government contracts will be awarded on an open tender basis, levelling the playing field for IJM since it has won nearly all its ongoing projects via open tender. This division is expected to remain the largest earnings contributor to the group in FY19E, supported by its high order book of RM9.4bn.

Its concrete product manufacturing business faces stiff price competition for its small diameter piles while there is cost pressure from high long steel product prices. Its property division is seeing pressure on profit margin due to weak demand in the prolonged market downturn. But it has the advantage of low land cost and able to sustain its operation via staggered launches of mostly landed homes. Its plantation operation will see higher CPO production as its Indonesian plantations start to mature. But lower average selling prices and higher tax rate will hold back earnings growth.

Concerns Reflected in Share Price

IJM’s current CY19E PER of 12x is also comparable to Construction Sector weighted-average PER of 10x. We reduce our RNAV/share estimate to RM2.75 from RM2.82 previously to reflect lower valuation for its plantation division. This is partly offset by higher valuation for its port given stronger long-term FCF after factoring higher cargo throughput growth. Based on the same 10% discount to RNAV, we cut our TP to RM2.48 from RM2.54. Implied target PER of 17x is close to historical mean level. Share price is currently trading at an attractive 36% discount to our revised RNAV. We reiterate our BUY call on IJM.

Source: Affin Hwang Research - 9 Jul 2018