IJM Corp’s 1HFY19 result was below market and our expectations. Net profit fell 63% yoy to RM85m in 1HFY19, mainly due to net forex losses of RM127m and RM37.5m loss on disposal of its Indian tolled highway stake. Core net profit grew 7% yoy to RM230m in 1HFY19 and was slightly below our expectation. But the larger plantation losses and lower construction and industry earnings led us to cut our core EPS forecasts by 10-17% in FY19-21E. We downgrade our call on IJM Corp to HOLD from Buy with lower TP of RM1.97, based on higher 20% discount to RNAV.

Disappointing Result

IJM’s net profit of RM85m (-63% yoy) in 1HFY19 was only 17-18% of consensus and our previous full-year forecasts of RM480-486m. Core net profit grew 7% yoy to RM230m mainly due to lower taxation and positive minority interests, which was 48% of our previous FY19E estimate of RM480m. Core PBT declined 26% yoy to RM284m due to lower construction, industry and infrastructure earnings and losses for plantation segment.

Plantation Loss Drag

Revenue declined 10% yoy to RM2.75bn in 1HFY19 due to lower revenue for its construction (-12% yoy), industry (-21% yoy), plantation (-15% yoy) and infrastructure (-1% yoy) segments, while its property division posted a 5% yoy growth. PBT plunged 62% yoy to RM139m, mainly due to RM58m and RM11m losses for its plantation division and investments respectively. Lower PBT for construction (-39% yoy), industry (-41% yoy) and infrastructure (-67% yoy) segments were partly offset by higher property PBT (+18% yoy).

High Order Book and Unbilled Sales

IJM’s high remaining order book of RM8.8bn and unbilled sales of RM2bn will support construction and property earnings in FY19-21E. IJM achieved property pre-sales of RM0.75bn and remains confident to meet last year’s level of RM1.6bn in FY19.

Downgrade to HOLD

We revise down our RNAV/share estimate to RM2.46 from RM2.73 to reflect lower plantation and Indian highway concession valuations, and lower market value for other listed assets. Based on a higher 20% discount to RNAV/share (10% discount previously), we cut our TP to RM1.97 from RM2.45 previously. We downgrade our call to HOLD from Buy.

Exceptional and forex losses

IJM incurred net exceptional losses of RM18m in 1HFY19, mainly due to RM37.5m loss (accumulated profit write off and forex loss) from the disposal of its remaining 30% stake in Swarna Tollway in India to Macquarie Infrastructure Corp’s India fund.

Construction and Property Are Main PBT Contributors

Group PBT contributors in 1HFY19 were construction (38% of PBT), property (32%), infrastructure (16%) and industries (14%) divisions. There were also net forex losses of RM127m for its construction, infrastructure and plantation divisions. Core PBT plunged 45% yoy and 39% qoq to RM107m in 2QFY19 mainly due to lower construction and property earnings, and larger plantation losses. Prospects for its plantation, industries and infrastructure (higher interest expense and depreciation from its Kuantan Port expansion) remains challenging in 2HFY19 but its construction and property divisions should see improvements as progress billings accelerate.

Bidding for New Projects

IJM is looking to bid for new government hospital projects and the RM5bn Klang Valley Double Tracking project given its strong track record in undertaking these type of projects. It secured a RM505m new contract for the 47-storey Affin Bank office building at Tun Razak Exchange recently.

Key Risks

Key upside risks is a recovery in property sales and higher new construction contract wins. Key downside risks are slower property sales and government policy risk for its toll road concessions.

Source: Affin Hwang Research - 27 Nov 2018