What’s New

• IJM announced that the Group had accepted the Letter of Acceptance from National Highways Authority of India (NHAI) for the project “Four – Laning Solapur-Bijapur Section of National Highway” in the state of Maharashtra and Karnataka. The project will be executed on Build, Operate, Transfer (BOT) mode with design, build, finance, operate and transfer (DBFOT) basis.

• The total project cost is estimated to be INR 2,325 Crores (about RM1.5b) and NHAI will provide a grant of INR 367 crores (about RM235.9m) for the project.

• The scope of works of the project include rehabilitation, upgradation and widening of the existing 2 lane carriageway to 4 lane standards with the construction of new flexible pavement, construction and/or rehabilitation of structures to cater for 6 laning comprising major and minor bridges, flyovers, railway overbridge, culverts, road intersections, interchanges, drains, 2 toll plazas, the operation and maintenance thereof.
• The concession period of the project is 20 years including construction period of 30 months from financial closure and is expected to be completed in 2021.

Comment

• Thus far, the Group has successfully secured RM3.56b construction works during FY18 which accounts for 118.7% of the Group’s target orderbook replenishment of RM3b for FY18F. Notably, RM1.5b out of the RM3.6b are building works.

• After taking into account the newly clinched project, IJM’s outstanding orderbook is now close to RM11.4b. Assuming a net profit margin of 9%, we expect this contract to generate net earnings of RM134.37m to the Group for the construction part, or equivalent to EPS of 3.7 sen from FY19 till FY21.

• Overall, we are positive with the contract as the group is able to gain from the construction works, future toll collection and potential disposal gains upon maturity of the toll operations. The group completed similar arrangement (BOT) in India before and we believe the group is able to tap on previous experience and generate positive value to shareholders despite the funding requirements for the project. Assuming the group funds the project with debt to equity ratio of 70:30, we shall see the group’s net gearing to increase to 44.9% from 36.7% as of 1QFY18.

Earnings Outlook/Revision

• We retain our earnings forecasts for FY18 and FY19 as the new contract is within our estimate.

Valuation & Recommendation

• Maintain 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 IJM for its well-diversified business model, which cushions the downside risk of cyclical nature for its individual segmental business.

Source: JF Apex Securities Research - 23 Nov 2017