News  IJM’s 25.1%-owned associate, Kumpulan Europlus (KEURO) (NR) announced yesterday that the government has appointed the consortium of IJM Construction and KEURO (IJMC-KEURO) as the Turnkey/Engineering and Procurement Contractor for the construction of the West Coast Expressway (WCE) project for a fixed sum contract not exceeding RM5.04b.

 The project has 11 packages and IJM has been directly awarded to undertake Sections 3,4,5,8 and 9 of the highway project for RM2.83b.

 Meanwhile, the remaining packages of Sections 1, 2, 6, 7, 10 and 11 of the WCE project which worth RM2.22b will be on an open tender basis in accordance with the Concession Agreement dated 2 January 2013.

Comments  Although the RM2.83b contract value for IJM fell short by 20-30% from our earlier expectation of about RM3.5-RM4.0b, we believe IJM will be tendering for the remaining RM670-RM1.0b shortfall in the open tender packages. We also expect turnkey fees for the consortium.

 This project will boost IJM’s current external orderbook of approximately RM1.3b to about RM4.1b. With this contract, IJM has secured RM3.22b new contracts YTD; well-within our FY15 assumed new orderbook of RM4.0b.

Assuming a PBT margin of 5%, we estimate the project will contribute on average RM21m to the Group’s net profit over the next 5 years.

 Also, as previously mentioned, the project will not only boost IJM’s orderbook, it will also complement other IJM’s

segments where; (i) its 62-% owned subsidiary, IJM Land (OP; TP: RM3.15) is currently developing the new township worth RM11b GDV spanning over 1878ac in the Kota Kemuning area next to the WCE highway, (ii) the highway will keep its industry division busy supplying quarry products and concrete piles to the highway, and (iii) over the long-term, once the highway is completed (estimate in 2019), it will bring another stream of recurring income in the foreseeable future to IJM as it effectively owns 39% of the highway operator, WCESB (i.e. direct stake of 20% of WCESB and 25% of KEuro).

Outlook  Finally, the long-awaited WCE project materializes. Going forward, IJM’s outlook still remain bright in a foreseeable future thanks to (i) bright orderbook replenishment prospects coming from Kuantan Port expansion and

RAPID, and (ii) higher FFB growth coupled with higher CPO price recently from its plantation division.

Forecast  Maintained.

Rating Downgrade to MARKET PERFORM

 IJM’s share price has been running and is now approaching our SoP-based TP of RM6.74. So far, the stock has appreciated by 13.1% YTD. Due to limited upside to our TP, we downgrade IJM’s rating to MARKET PERFORM.

Valuation  Target Price (TP) is maintained at RM6.74 based on SoP.

Risks to Our Call Delays in construction projects, especially WCE,

 Higher-than-expected input costs, and

 Slower-than-expected property sales.

Source: Kenanga