Results

• IJM reported a PATAMI of RM21.9m for its 2QFY19, which tumbled 65.1% qoq and 80.2% yoy.

• Meanwhile, IJM reported a core net profit of RM100.3m, which was down 8.2% qoq and 18.3% yoy. We derived our core net profit after adjusting for net losses on forex exchange, net losses on disposal of investments or properties and gains in financial derivatives instrument.

• QoQ performance was mainly bogged down by widening losses in plantation segment and unappealing performance in property segment.

• Unfavourable YoY performance was a result of lackluster performances in construction, plantation, Industry and Property segments.

• Below expectations – 6MFY18 core net profit of RM209.6m only matches 42% and 43.1% of ours and consensus’ full year forecast respectively. Undesirable performance was mainly dragged down by loss in Plantation segment (higher cost and soft average selling price) and insipid performance in Industry (lower volume and average selling price in view of fierce competition given lower demand).

Comment

• Construction segment performance fazed by slowing down of progress as new projects yet to reach optimal construction phase. Adjusted PBT was down 29% qoq and 28% yoy in view of lower recognition from new projects. As such, 6MFY19 adjusted PBT slid 12.2% yoy to RM108.9m. Construction progress is expected to pick up in coming quarters after buildings jobs commencing its above ground portion.

• Construction order book stands at RM8.8b. A breakdown of 30% for buildings works, 41% for roads works, and 29% for Other infrastructure works. Looking forward, the group is targeting to replenish its orderbook by tendering in Hospital works from government and a possible upgrade works in Klang Valley Double Track (KVDT) rail upgrade project.

• Property segment’s performance slid QoQ and YoY given lower sales and lower margin achieved but YTD performance improved on lower operating expenses. PBT dropped 51.2% qoq and 36% yoy. However, cumulatively, PBT up 13.7% yoy to RM66.8m, thanks to lower operating expenses.
• Property segment underpinned by RM2.0b unbilled sales with RM750m sales achieved in 1HFY19. 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’s sales volumes and margins in piles remained uninspiring. PBT improved 22.3% qoq but declined 41.4% yoy. Overall, YTD PBT was down 41.4% to RM29.2m given lower sales volumes and margins in the piles and quarrying sectors. Looking forward, segment performance is underpinned by outstanding orders of 6 month and the group is targeting to replenish its orders by exploring Vietnam and Bangladesh markets.

• Lower cargo throughput and loss on disposal of 30% equity interest in Swarna Tollway bogged down Infrastructure segment despite better performance in Malaysian tolls operation. PBT plunged 65.7% qoq and 76.1% yoy. Meanwhile, 6MFY19 PBT was down 66.7% yoy to RM33.4m. After adjusting for disposal losses and forex losses, adjusted YTD PBT was up 8.3% to RM113.4m. Better performance was mainly attributed to growth in Besraya Expressway and compensation from government (for not having toll hikes).

• Soft average selling price eroded plantation performance. After adjusted for unrealised forex losses on the US dollar denominated borrowings, Plantation segment recorded loss before tax of RM9.1m in 2QFY19 from PBT of RM4.6m in 1QFY19 and RM26.8m in 2QFY18. Nevertheless, YTD performance slid into loss of RM4.2m as compared to 6MFY18’s PBT of RM52.3m.

• Declared first interim dividend of 2sen/share with Ex-date on 11 Dec 2018. We expect a total dividend of 6 sen/share for FY19, which translates into a dividend yield of 3.3% based on current share price.

Earnings Outlook/Revision

• We tweak down our earnings forecasts for FY19 and FY20 by 11.7% and 12.2% respectively in view of challenging outlook for Plantation and Industry segments.

Valuation & Recommendation

• Maintain BUY with a lower target price of RM2.05 (RM2.23 previously) after we lowered our fair value for IJM plantation and earnings for Industry segment. We derive our target price using SOP valuation. Our fair value for IJM also implies 15x 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 - 27 Nov 2018