Results

• IJM reported a PATAMI of RM11.2m for its 4QFY18, which dropped 89% qoq and 95.3% yoy.

• The Group reported 4QFY18 core net profit of RM21m, which nosedived 80.4% qoq and 90.1% yoy. We derived core net profit after adjusting for net foreign exchange gains, net losses on forex exchange borrowings and losses in financial derivatives instrument. The lackluster performance was mainly attributed by unfavourable performance in Property, Industry, Plantation and Infrastructure segments which slightly mitigated by better performance in Construction segment. Besides that, higher administration also putting downward pressure towards 4QFY18 performance.

• 12MFY18’s core net profit fell 37% yoy given negative growths in all segments except construction segment.

• Below expectations – 12MFY18 core net profit of RM378.6m was below our and consensus expectation by matching 84% and 72% of full year forecast respectively. The negative variation was mainly bogged down by lackluster performance in all segments except construction segment.

Comment

• Construction Segment posted a better performance with higher work recognition. 4QFY18 PBT up 9.9% qoq but down 6.8% yoy as we witnessed QoQ margin improvement but YoY slide in margin. Meanwhile, 12MFY18 PBT up 4.3%, underpinned by higher revenue in view of higher work recognition.

• Construction order book stands at RM9.4b with a target order book replenishment of RM2b in FY19. Thus far, the group has managed to secure 3 buildings works (UOB Tower2 – RM451m, HSBC office building - RM392m and Uptown 8 office tower – RM378m), a tollway (Salapur-Bijapur India highway – RM1.26b), Kuantan breakwater contract (RM280m) and LRT3 contract (RM1.116b). We understand that IJM is aiming for local building works whilst seeking opportunity in India to further replenish its order book.
• “Construction work” as usual – We understand that the group expects works for LRT3 and KVMRT2 will continue as usual following recent call off of HSR and MRT3 by the new government. As such, outstanding orderbook of RM9.4b will contribute PBT earnings visibility of RM752m (assumed 8% PBT margin) spanning across the next 4 years.
• Property performance continued to deteriorate. 4QFY18 PBT dropped 18.9% qoq and 88.9% yoy on the back of lower revenue (-11.2% qoq and 44.1% yoy) in view of dull property market. Lower margin was mainly due to unfavourable product mix. Similarly, 12MFY18 adjusted PBT plunged 29.1% with revenue slid 13.4% (excluding one-off gains of land sales in FY17:RM123.1m)

• Nevertheless, property segment underpinned by RM2.0b unbilled sales. We understand that the group achieved new sales of RM1.6b in FY18, which is 14% higher as compared to RM1.4b in FY17. Looking forward, IJM keeps its target new sales of RM1.6b and focuses on township and landed developments in Bandar Rimbayu, Shah Alam 2 and Seremban 2 to drive sales.

• Industry segment fazed by higher supply pressure for low diameter piles and suffered price war in ready-mixed concrete sector. 4QFY18 PBT tumbled 30.9% qoq and 63.7% yoy as a result of lower sales volume (revenue down 16.5% qoq and 20.7%) which compounded by lower margins in piles and quarrying sector. Similarly, 12MFY18 PBT slumped 42.1% given increased raw material prices and lower sales volumes in the quarrying and domestic ready-mixed concrete sectors.

• Infrastructure segmental performance remained flat. The group registered 4QFY18 losses before tax of RM22.2m as compared to RM42m PBT in 3QFY18 and RM35.5m PBT in 4QFY17. We understand the loss was due to impairment in Scomi investment that consolidated under this segment. Meanwhile, adjusted 12MFY18 PBT (excluding forex gains of RM57.6m in FY17) inched down marginally by 1.2% despite higher throughput from port sector whilst overseas infrastructure sector was bogged down by the abovementioned impairment.

• IJM is yet to approach by MOF regarding toll concessions issue – We understand that IJM is yet to approach by MoF for the discussion of toll concessions. Meanwhile, no further clarity of toll concessions issue from MoF is being announced. Thus, we believe that there will be no imminent action is taken to abolish toll concessions as it may cause disruption in traffic (if only certain tolls are abolished) and uncertainty in capital market (both bond holders and any possible future infrastructure fund raising.) Nevertheless, outlook for the port would be backed by contribution from Alliance steel which will start operation in Malaysia-China Kuantan Industrial Park (MCKIP) this year.

• Lower revenue and net forex loss eroded performance in Plantation segment. 4QFY18 PBT dropped 94.2% qoq and 94.9% yoy as a result of lower CPO volume and sales price coupled with net forex loss. Meanwhile, 12MFY18 PBT dropped 54.1% yoy with revenue inched down 0.9% yoy. The lacklustre performance was due to higher costs (replanting activities, minimum wages and maintenance overhead) coupled with net forex loss of RM24m in FY18 (against PBT of RM1.8m in FY17). Looking forward, IJM believes that the group is able to achieve FFB production of 1m mt.

Earnings Outlook/Revision

• We tweak down our earnings forecast for FY19F by 2% and introduce our earnings forecast for FY20F, which could see a 3.8% yoy growth.

Valuation & Recommendation

• Maintained BUY call with a lower target price of RM2.23 (RM3.27 previously) following our SOP adjustment as we lower down our sustainable orderbook for construction segment from RM3b to RM2b as well as ascribing lower PER of 16x (previously 18x) to account for the cancellation of mega projects by the government. Our fair value for IJM also implies 16x FY2019 PER.

• We still favour the group for its well-diversified business model, which cushions the downside risk of cyclical nature for its individual segmental business. Nevertheless, construction industry is now facing headwinds in view of fewer mega projects. Therefore, contractors are competing among themselves with limited jobs which could lead to margin compression. However, we believe IJM has the know-how and experience in tendering jobs based on its past track record.

Source: JF Apex Securities Research - 31 May 2018