Results

• IJM reported a headline bottom line of RM163.9m for its 2QFY17, which surged 41.9% qoq and 4.8% yoy.

• Better qoq but weaker on yoy for its 2QFY17 core net profit of RM149.8m - After stripping out net forex gains (RM16.72m) and derivatives contract losses (RM3.05m), IJM’s core earnings improved 37.6% qoq but dropped 19.7% yoy. The appealing qoq performance was mainly attributed to improvement in various segments except infrastructure given lower base for various segments in last quarter. However, on yearly basis, it was bogged down by the lackluster property segment coupled with relatively higher effective tax rate .

• Meanwhile, the group recorded 6MFY17’s core net profit of RM258.6m, down 24.5% yoy. Despite growth in Construction segment as higher contributions on WCE and Kuantan Port, the overall modest performance of 1HFY17 mainly dragged down by lackluster Property segment amid current industry headwinds. Also, group’s results were affected by Industry segment given current moratorium on bauxite related activities, which capped cargo business.

• Broadly within expectations –6MFY16 core net profit met 41% and 42% of our full year forecast and consensus expectation respectively. However, we expect stronger 2H.

Segmental Highlight

• Construction segment remained the saviour in 2QFY17. Construction segment continued recording salient revenue growth, +12.8% qoq and 54.7% growth yoy. Similarly, 1HFY17 revenue for construction saw vast growth of 83.3% yoy. However, the effect was whittled by lower PBT margin, slid 4.02pts yoy to 10.3%, reflecting current portfolio of jobs secured, namely West Coast expressway, MRT 1, new deep water terminal in Kuantan Port, coupled with building jobs of Equatorial Plaza in KL and Puteri Cove Residences in Johor.

• Construction order book stands at RM8.2b. The order book stands at RM8.2b consists of 43% roads related works, 26% building construction jobs and 31% of infrastructure jobs. Looking forward, the Group feels positive to replenish its order book from various infrastructure works such as Pan Borneo highway, LRT3, SUKE Highway and DASH Highway. Notably, the abovementioned contracts require higher proficiency in respect of elevated portion for highways.
   
• Property remained sluggish despite an improvement in 2QFY17’s PBT on quarterly basis given low base in 1QFY17. Property segment 2QFY17’s PBT up 62.9% qoq but plunged 61.5% yoy. Cumulatively, 6MFY17’s PBT dwindled 61% to RM52m while revenue only inched down 2.7% yoy as shift in product mix with higher focus on affordable properties and more incentives offered to buyers has ebbed the margin. Besides, unrealized forex loss of RM10.2m for 6MFY17 as compared to gains of RM48.9m in 6MFY16 further dented the PBT figures.
• Nonetheless, Property segment underpinned by RM1.7b unbilled sales after gaining RM700m new sales for the first half. The Group will continue focusing on township and landed development and offering mass market products with attractive absolute pricing. We learnt that the Group plans to have new launches of up to RM600m in 2HFY17 and achieve target sales of RM1.4b for full year in FY17, which is in tandem with FY16’s new sales. Projects to launch imminently consists of a.) Rimbuan Vista Double Storye Link, Seremeban 2; b.) Water Residence, Penang; c.) Double Storey Home Phase 10, Bandar Rimbayu and d.) Riana Dutamas, Kuala Lumpur.
   
• Industry segment sustained its growth momentum. The segmental revenue for this quarter continued its positive momentum, up 25.9% qoq and 14.6% yoy, mainly due to increase in the delivered tonnage piles by 25% and quarry products by 60.1% on yearly basis. Meanwhile, current PBT improved 47% qoq and 3.2% which was in line with the segmental revenue growth. However, cumulatively revenue edge up 0.8% but PBT retreated 15.4% yoy as a result of lower margins in smaller piles and lower sales volume for ready-mixed concrete.
   
• Infrastructure segment, the culprit that decimated the Group’s earnings in 6MFY17. Infrastructure segment 6MFY17’s revenue decreased 49% yoy. At the same time, PBT dwindled by 82.3% yoy. The unappealing performance was attributed to 68% drop in cargo throughput in view of current moratorium on bauxite related activities and as a result of fewer income generating concessions after disposals of tollways. Furthermore, the compelling performance in 1QFY16 was lifted by one-off gains from the disposal of a 74% equity interest in Jaipur-Mahua Tollway.
   
• Plantation segment lifted by higher CPO and PKO selling prices – Plantation segment’s 2QFY17 revenue improved 44.5% qoq and 38.8% yoy as a results of better FFB production coupled with better selling prices. Likewise, 6MFY17’s revenue notched up 18.8% yoy as better CPO selling price (Malaysia operation +22.9% yoy and Indonesia operation +25.4% yoy) outweighed the slide in FFB production (-8.4% yoy). As such, 6MFY17’s PBT recorded RM102.7m against losses of RM6.4m for 6MFY16.The performance was also fazed by net foreign exchange gains of RM14.8m in 6MFY17 and losses of RM51.7M in 6MFY16.
   
• Declared first interim dividend of 3 sen per share with ex-date on 14 December 2016. This translating into dividend yield of 0.9% based on current share price.

Earnings Outlook/Revision

• We keep our earnings forecast for FY17 and FY18 unchanged, expecting stronger 2H.

Valuation & Recommendation

• Value re-emerges. Upgrade to BUY call with an unchanged target price of RM3.76 in view of recent weakness in the share price, which provide upside potential. Our fair value for IJM is based on SOP valuation, which implies 20.1x FY2018 PER. We favour the group for its well-diversified business model, which cushions the downside risk of cyclical nature for its individual segmental business.

Source: JF Apex Securities Research - 29 Nov 2016