IJM’s FY14 core net profit of RM539m (excluding one-off of RM290m) came in slightly below ours (82%) and consensus (85%) estimates. The negative variance was due to us overestimating its construction revenue and earnings. Nevertheless, we came away from IJM’s 4Q14 Analyst Briefing yesterday feeling POSITIVE on the overall prospect of the Group. IJM’s total order book currently stands at RM5.2b (internal: RM800m) and it is expected to replenish more than RM1.0b in the nearmedium-term. Amongst the projects that it is eyeing now are: (i) Kuantan Port expansion, (ii) high-rise building contracts, and (iii) other WCE’s open tender packages. Management also briefed on the announcement of Heads of Agreement (HoA) with SILK Holdings (NR) to acquire the latter’s 100% equity interest in Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (SILK) for RM398m. All in, we are maintaining our MARKET PERFORM rating on IJM with revised Target Price of RM6.83 from RM6.74.

4Q14 Results Review. IJM’s FY14 core net profit of RM539m (excluding oneoff items of RM290m) came in slightly below ours (82%) and consensus (85%) estimates. The negative variance was due to us overestimating its construction division’s revenue and earnings. YTD, FY14 net profit grew by 20% driven by all divisions’ stronger performance. QoQ, net profit declined slightly by 9% to RM112.6m mainly due to higher taxation. YoY, IJM’s core net profit rose by 27% thanks to stronger performance across all divisions.

Special dividend declared. On top of an 11 sen second interim dividend, IJM declared additional 10 sen as a special dividend. Cumulatively, IJM had declared 25 sen of dividend in FY14, which translated to 3.8% dividend yield. This is above than that of our expectation of only 13 sen.

Orderbook replenishment prospect stays bright. IJM’s outstanding order book currently stands at RM5.2b which will keep them busy for the next 4-5 years. Year-to-date, IJM has secured approximately RM3.2b new contracts with the bulk coming from the WCE’s direct award of RM2.8b. Going forward, IJM’s order book replenishment prospects remain bright driven by couple of sizeable jobs namely Kuantan Port Expansion (RM1.0-2.0b), high-rise buildings (more than RM1.0b), and WCE’s open tender jobs (RM2.2b).

Acquiring SILK highway. IJM has entered into HoA with SILK Holdings (NR) to acquire 100% equity interest in SILK for a cash consideration of RM398m. The price tag translates into 1.8x PBV and 13x EV/EBITDA which we think is fair judging from Litrak’s PBV and EV/EBITDA of 3.9x and 9.3x respectively. This is in line with the Group’s objective to increase its recurring income. SILK highway is the crucial link connecting IJM’s other highways i.e. New Pantai Expressway (NPE), Besraya Highway and its loss-making Lekas Highway. Even though the highway sufered RM16m losses in FY13, we believe with the scheduled toll hike in 2015, the highway will start to make some small profits next year. With SILK coupled with the 233km WCE highway in hand, IJM soon will be the 2nd largest toll operator in Malaysia. Based on the assumption of average daily traffic volume growth of 8% every year, scheduled toll hike of 38% in 2015 and 33% in 2020, discount rate of 8%, we derived at our DCF value for the highway (FCFE) at RM530.8m; 33% higher than its cost of acquisition. With this acquisition also, net gearing of IJM will increase but to still manageable level of 0.5x-0.4x.

Forecasts. Minor tweak of -3.2% on FY15 net forecast due to expected higher start-up costs on newly-opened Besraya Extension couple of weeks ago. We also introduced our new FY16E net profit forecast of RM716.7m. Maintain MARKET PERFORM. All in, we are maintaining our MARKET PERFORM recommendation with revised SoP-based Target Price (TP) of RM6.83 (implying 14.3x fwd-PER close to its 5-year historical mean of 15.1x) from RM6.74. Revised TP is after we imputed in DCF-value for its SILK highway into our SoP. IJM’s upside potential appears limited at this juncture as the share price has been rallying (12.2% YTD) since we feature the stock as our Top Pick early of this year.

Source: Kenanga