Results

• IJM reported a headline bottom line of RM138.4m for its 3QFY17, which slid 15.6% qoq and 46% yoy.

• Weaker qoq but stronger yoy for its 3QFY17 core net profit of RM136.1m - After stripping out net forex gains (RM3.89m) and derivatives contract losses (RM1.79m), IJM’s core earnings down 9.1% qoq but surged 53.9% yoy. The culprit for the insipid qoq performance was bogged down by subdued infrastructure in view of the pro-longed moratorium on bauxite related activities, which is extended until March 2017. However, on yearly basis, the appealing performance was attributed to improvement in various segments except infrastructure given lower base for various segments in 3QFY16.

• Meanwhile, the group recorded 9MFY17’s core net profit of RM394.7m, down 8.2% yoy. Despite growth in Construction segment as higher contributions on WCE and Kuantan Port, the overall unfavorable performance of 9MFY17 was mainly dragged down by lackluster Property segment amid current industry headwinds. In addition, group’s results were dented by Industry segment given current moratorium on bauxite related activities, which capped cargo business.

• Below expectations –9MFY16 core net profit met 63% and 66% of our full year forecast and consensus expectation respectively.

Segmental Highlight

• Construction segment maintained its vibrant growth. Construction segment continued recording salient revenue growth, +11.2% qoq and 27.7% yoy. Similarly, 9MFY17 revenue for construction surged 57.8% yoy. However, the effect was whittled by lower PBT margin, slid 1.64 pts yoy to 9.4%, 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 RM8.74b after taking account RM1.16b a new design and build works clinched from MFBBCC Retail Mall Sdn Bhd.The newly bagged project is design and build for retail mall substructure and superstructure works with associated local infrastructure and landscaping works for Bukit Bintang City Centre Development at Jalan Hang Tuah. The construction periods is understand to be 40 months. Assuming a net margin of 10%, it will contribute RM116m to bottom line spanning 40 months. 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.
   
• Swift in product mix with more affordable properties and increased incentives offering for buyers dwindled property margin. Property segment 3QFY17’s PBT improved 29.2% qoq and doubled on yearly basis. However, 9MFY17’s PBT dwindled 39.1% to RM94.3m with revenue only inched down 1.2% yoy as shift in product mix with higher focus on affordable properties and more incentives offered to buyers has whittled the margin. Besides, the unrealized forex gains of RM0.2m for 9MFY17 as compared to gains of RM38.2m in 9MFY16 further undermined the PBT figures.
   
• Nonetheless, Property segment underpinned by RM1.76b unbilled sales in view of close to RM1.07b new sales achieved in 9MFY16. The Group will continue to focus on township and landed development and offer 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 FY17, which is on par with FY16’s new sales. At this juncture, the group has secured 76.4% of target new sales in FY17. Projects to be launched imminently consist 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 PBT for this quarter remained flat on quarterly basis but up 74.2% on yearly basis which was underpinned by increase in the delivered tonnage piles, +15.7% and quarry products, +69.6%. Meanwhile, cumulatively revenue and PBT improved by 8.4% yoy and 4.8% yoy respectively.
   
• Infrastructure segment decimated the Group’s earnings in 9MFY17. Infrastructure segment 9MFY17’s revenue fell 46.7% yoy. At the same time, PBT nosedived 94.3% yoy. The unappealing performance was attributed to lower cargo throughput in view of current moratorium on bauxite related activities and as a result of fewer income generating concessions after disposal of tollways. In addition, the subdued performance was fazed by one off gain from the disposal of a 74% equity interest in Jaipur-Mahua Tollway totaling of RM168.7m in the previous year.
   
• Performance of Plantation segment has ameliorated with 9MFY17’s core net profit up 51.1% yoy, back by higher selling price despite lower FFB production of 4.6% yoy. Malaysia operation 9MFY17’s PBT surged 72.3% yoy, underpinned by higher CPO (+26.4% yoy) and PKO (+75.6% yoy) selling prices which outweighed a slide in FFB production (-9.2%yoy). Meanwhile, Indonesia operation 9MFY17’s PBT of RM22.9m versus losses of RM15.86m in the preceding 9 months was lifted by higher FFB production (+2.3% yoy) coupled with higher CPO (+34.6% yoy) and PKO (+106% yoy) selling prices.

Earnings Outlook/Revision

• We tweak down our earnings forecast for FY17 by 12% after taking into account the pro-longed moratorium on bauxite related activities and a lower margin in property segment. Nevertheless we keep our earning forecast for FY18 unchanged.

Valuation & Recommendation

• Maintained BUY call with an unchanged target price of RM3.76. Our fair value for IJM is based on SOP valuation, which implies 21.7x 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 - 24 Feb 2017