We are upgrading IJM Corporation’s (“IJM”) rating to OUTPERFORM from MARKET PERFORM with a higher Target Price of RM6.63 from RM5.90 previously. Our enhanced TP is premised on the following factors: (i) incorporating 20% direct stake of WCE value into our SOTP-derived valuation, (ii) higher IJM Land’s fair value from RM3.50 to RM3.57 – subsequent to our TP revision after the Kumpulan Europlus’ (“KEuro”) proposed disposal of its 10% stake in Radiant Pillar to the former; and (iii) imputed KEuro’s fair value into our SOP. Hence, we are turning bullish on IJM after obtaining more clarity on the project’s financing viability following the recent corporate exercise by its 24%-owned associate KEuro coupled with the emergence of a new strong shareholder in MWE Holdings. We are positive on the inclusion of WCE due to the following: (i) it will benefit its construction division by doubling up its existing RM3.0b order book which will provide earnings visibility for the division over the next 5 years, (ii) it will benefit the property division given the fact that IJMLAND will own 60% stake in Bandar Rimbayu which has an approximate RM11b GDV spanning over 1878ac in the Kota Kemuning area next to the highway. Bandar Rimbayu Phase 1 has been successfully launched and sold while Phase 2 registered strong interests albeit being priced 10%-15% higher than Phase 1 and; (iii) the 20% direct stake in WCE will provide another stream of recurring income over the longer term.

WCE financing is intact. Since last month, IJM’s associate, KEuro, has undertaken few corporate exercises mainly to finance the WCE highway project. KEuro will be getting another strong cash-rich shareholder namely MWE Holdings where the latter has emerged as the substantial shareholder of KEuro last month after acquiring a 27.1% stake. Hence, with all equity financing plus a strong shareholder, KEuro will be able to finance the WCE highway project.

Incorporating WCE and KEuro. Hence, we are now incorporating WCE concession value into our SOTPderived valuation. Based on slightly higher toll rate of PLUS’s 14.5 sen/km, 5% yearly increment of average daily traffic volume of 32k starting from Year 6 and WACC of 8% (IRR of 13%), we derived WCE’s 60-year concession equity value at RM1.52b, which works out to be RM304m (22 sen/share) for IJM’s 20% interest in WCE. We also incorporate IJM’s 22%-owned associate, KEuro’s fair value in our SOTP which works out to be RM344m or 25 sen/share. We value KEuro at RM1.9b which is derived by valuing its 50% stake in Bandar Rimbayu at RM369m (based on RNAV) and 80% (RM1.2b) of WCE’s RM1.52b equity value. 

Synergy from WCE to benefit IJM. With WCE joining the group, we expect IJM’s businesses include (i) Construction, (ii) Infrastructure and; (iii) Property divisions to gain business synergy. As for Construction divisions, the management is looking to replenish up to RM4.0b orderbook from highway projects and this will easily double up its current orderbook of approximately RM3.0b. Meanwhile, WCE will also benefit its property division given the fact that IJMLAND will own a 60% stake in Bandar Rimbayu with an approximate RM11b GDV spanning over 1878ac in the Kota Kemuning area. Phase 1 of the project has been fully taken up even though the highway has not been built yet. 

Maintain OUTPERFORM on IJMLAND with higher TP of RM3.57. We raise our IJMLAND’s FD RNAV by 8.0 sen or 3% to RM3.57 after increasing its stake in Bandar Rimbayu to 60% from 50% and our TP is on parity with its FD RNAV. We view the exercise as positive as it means more earnings going forward especially when Bandar Rimbayu Phase 1 has been successfully sold while Phase 2 registered strong interests as well albeit being priced 10%-15% higher than Phase 1. The exercise will increase FY14-15E core earnings by 3%-4% from the increased stake in Bandar Rimbayu.

UPGRADE IJM to OUTPERFORM with higher TP of RM6.63. We made minor adjustment on our earnings by +2-3% in FY14E-FY15E to reflect IJM Land’s earnings revision. All in, we upgrade IJM’s rating to OUTPERFORM from MARKET PERFORM with higher Target Price of RM6.63 from RM5.90 previously. The next re-rating catalyst, we believe, will be from its Kuantan Port expansion to build a RM3.0b mega deepwater terminal in a joint-venture with a Chinese party. The MOU has already been signed where IJM Corp is selling 40% of Kuantan Port to Guangxi Beibu Gulf International for RM310m. It is expected that the definitive agreement of the MoU will be inked by this year. This will boost IJM’s orderbook by approximately RM1.0b next year. Other re-rating catalysts is if the new  contracts this year exceeds our orderbook replenishment assumptions which we think is possible as IJM is now eyeing other jobs in the high-rise tower building and O&G (RAPID) jobs through its associate, Scomi (NOT RATED).

Source: Kenanga