IJM Corp’s 9M FY20 results were below market and our expectations. The high effective tax rate and minorities were the main surprises. Net profit was flat at RM179m in 9M FY20 despite a 33% yoy jump in PBT. Core net profit fell 35% yoy to RM198m. We cut our FY20-22E core EPS by 13-17% to reflect the higher tax rate and minorities, and slower orderbook replenishment. We cut our TP to RM2.02, based on a 20% discount to our reduced RNAV estimate. We maintain our HOLD call.

Below Expectations

IJM reported net profit of RM179m (+1% yoy) in 9M FY20, which comprises only 44-54% of consensus and our previous FY20 forecasts of RM334-403m. The associates’ losses of RM57m were mainly from WCE and the Argentina toll-highway operation (unrealised forex loss). Revenue grew 7% yoy to RM4.56bn in 9M FY20, driven by higher construction (+4% yoy), property development (+9% yoy), plantation (+17% yoy) and infrastructure (+17% yoy) revenue. Only industry revenue declined (-3% yoy) due to weak demand for concrete piles.

Plantation Turnaround

PBT jumped 33% yoy to RM421m in 9M FY19 due to net forex gain and lower exceptional losses. All core divisions except construction saw positive growth: property development (+11% yoy), industry (+5% yoy) and infrastructure (+11% yoy). Its plantation arm turned around to post a PBT of RM23m in 9M FY20, mainly due to higher production volumes. Higher infrastructure PBT was mainly due to higher Kuantan Port earnings (+156% yoy), driven by cargo throughput growth.

High Construction Order Book and Sustained Property Sales

IJM has been slow in replenishing its order book (no major contracts secured), but it remains high at RM4.5bn. It is targeting to secure RM1.5bn in new contracts in FY20 with potential construction work for its joint-venture The Light Commercial project. It achieved property sales of RM1.2bn in 9M FY20 and is on track to meet its RM1.6bn target for FY20.

Cutting Our Target Price

We cut our RNAV/share estimate to RM2.52 from RM2.75 to reflect lower construction and industry valuations (lower sustainable earnings pegged at PER of 14x), partly offset by a higher plantation valuation (TP upgrade for IJM Plantations). Based on the same 20% discount to RNAV, we cut our 12-month TP to RM2.02, from RM2.20. We maintain our HOLD call.

Source: Affin Hwang Research - 26 Feb 2020