Results

• IJM reported a net profit of RM59.4m for its 1QFY20, which tumbled 75.3% qoq and 5.3% yoy.

After adjusting for net gains on disposal of investments and properties, net loss on forex exchange and net gain on derivative, the Group registered core net profit of RM60.1m, down 29.9% qoq and 54.8% yoy.

• Below expectation. The Group’s 3MFY20 core net profit is below our and consensus expectation, meeting 13.9%/13.5% of our/consensus full year net profit estimates, mainly bogged down by losses in plantation segment in view of soft CPO price and higher cost.

Comment

• Construction – weaker qoq but better yoy earnings.

The Group’s PBT decreased -34.4% qoq mainly due to increase contribution from jointly control entities in 4QFY19. Besides, PBT increased 2.3% yoy as a result of decrease in unrealized forex losses in 1QFY19.

• Uncertainties on the outcomes of LRT3 contract. To recap, IJM received a notice of termination from MRCBGeorge Kent (MRCBGK) on terminating the Work Package contractor for the LRT3 contract. However, we believe this might not be the final outcome as Prasarana or the turnkey contractor might continue the LRT 3 project with IJM by remodeling to a fixed price contract model.

• Construction order book stands at RM6.1b after the loss of contract for LRT3 (i.e. RM1.1b). A detail breakdown of job scope consists of 29% for buildings works, 41% for roads works, and 30% for other infrastructure works.

• Property segment – lower qoq but slightly higher yoy earnings. As compared to 1QFY19, PBT increased 2.1%, underpinned by higher revenue of 38.2% yoy. The stellar performance backed by higher sales recorded from Township and landed developments (ie. Bandar Rimbayu, Shah Alam 2 and Seremban 2).

• Property segment underpinned by RM2.0b unbilled sale. Looking forward, we believe the group is able to achieve its target new sales of RM1.5b in FY20, mainly underpinned by its township and landed developments in Bandar Rimbayu, Shah Alam 2 and Seremban 2.

• Industry segment – stronger qoq and yoy earnings.

Segmental PBT/PBT margin was up 15.5%/0.9ppts yoy, thanks to slightly better margin from piles and ready-mixed concrete sectors. Looking forward, with the revival of mega projects (ie. ECRL) might see better performance from this segment.

• Infrastructure segment – Lackluster qoq but better yoy performance. The Group posted a weaker PBT (- 74.1% qoq) boosted by one-off recognition under Argentina toll concession’s investment in 4QFY18. However, the Group achieved a better PBT (+78.7%) yoy mainly supported by expansion of cargo throughput handled by the Group’s port concession. Looking forward, we expect better performance from Kuantan Port (i.e. 10% to 15% growth yoy) due to increase in throughput volume (i.e. improved activity at Malaysia-China Kuantan Industrial Park).

• Possible acquisitions on toll highways takeover. To recap, the government has received several proposals to take over 15 highways including North South Expressway (NSE), which values at a combined of RM43b. As such, Lekas and Besraya highway might be a potential targets, since both highway toll concessions receive compensation by government for deferring toll rate hikes. As such, this translates to an equity value of RM0.19/share, which could be used to pay special dividends.

• Plantation segment – Disappointing qoq and yoy performances. Segmental revenue decreased 19.3% qoq and 27.3% yoy, as a result of decease in CPO price (- 19.8% yoy to RM1921/mt) and sales volume. Looking forward, the segment will continue to face cost pressure arising from wage increase.

Earnings Outlook/Revision

• We tweak down our earnings forecasts for FY20 and FY21 by respective 6.5%% and 8.1% in view of losses incurred in Plantation segment. Our FY20F and FY21F earnings forecasts represent growths of +3.2% and +14.8% respectively.

Valuation & Recommendation

• Upgrade to HOLD from SELL with an unchanged target price of RM1.98 due to recent fall in share price. We derive our target price using SOP valuation. Our fair value for IJM also implies 17.5x FY2020 PER.

Source: JF Apex Securities Research - 29 Aug 2019