Period  2Q15/1H15

Actual vs. Expectations  1H15 core net profit of RM269.5m came in below expectations, accounting for 38% and 40% of our, and consensus, full-year estimates, respectively.

 The negative variance was due to: (i) slower-thanexpected progress billings in construction division and (ii) slower-than-expected property sales recognition and margins (see today’s report on IJM Land)

Dividends  An interim dividend of 4 sen was declared as expected.

Key Results Highlights QoQ, 2Q15 revenue fell 6% dragged down by construction division (-22%). Billings were slow as most of the group’s projects have already been completed last financial year and at the same time other projects were still at the early-mid stage of construction. 2Q15 core net profit also declined by 8% due to: (i) sluggish performance in infrastructure segment (core PBT down 81%) following major maintenance provisions in Swarna Tollway Pte. Ltd, and (ii) higher effective tax rate.

 Overall, 2Q15 core net profit fell by 26% YoY and 12% YTD, mainly due to the above-mentioned reasons coupled with slower-than-expected property billings and margins (see today’s report on IJM Land for details).

Outlook  We attended IJM’s Analyst Briefing yesterday and came away from the briefing feeling NEUTRAL. Below are the key takeaways from the briefing:

 SILK’s highway acquisition being called off explained. Following our comments on the news yesterday, management has further explained that after careful due diligence in the past six months, the group decided not to proceed with the acquisition as both parties could not reach the agreed point in terms of valuation of the highway.

 Construction division will be very busy starting next year onwards. Management also updated that the RM5.0b WCE highway (IJM’s portion: RM2.8b) will start physical works early of next year onwards. Besides, management also mentioned the RM1.1b 1^st Phase of Kuantan Port expansion might be started as soon as early next year as the port’s privatisation agreement is currently being finalized.

 In total, IJM’s orderbook currently stands at RM5.1b (excluding RM1.1b Kuantan Port) with 54% coming from WCE highway. The management is also actively looking for new jobs namely: (i) Menara Warisan (RM2.0b), (ii) building jobs (RM400m), and (iii) LRT3, MRT2, and Penang Integrated Transport. We have assumed IJM to replenish at least RM1.0b in FY15. So far, YTD, it has secured RM356m worth of orderbook.

 All in, post-briefing, we reaffirm our view that IJM is in the midst of entering into a new phase of growth starting FY16 onwards as almost all of its businesses are in the “earnings expansion mode” as (i) it has a fat construction orderbook of RM5.1b and potential new wins of RM1.0-RM2.0b, which will provide earnings visibility at least for the next four years, and (ii) it is in the midst of completing the IJM Land’s privatisation exercise (3Q15) which would then boost its PATAMI by another 20% in FY16.

Change to Forecasts We revised downwards our FY15E-FY16E earnings by 10%-11% after: (i) we adjust downwards our construction revenue by 15%-20% as had we overestimated the group’s construction billings previously, and (ii) downward revision (9-12%) in property earnings (see IJM Land’s report today for details)

Rating Maintain OUTPERFORM

 We advocate investors to accumulate IJM given its deep value backed by its exciting near and long-term growth prospects.

Valuation  After (i) we strip out SILK Holdings’ DCF-based valuation (i.e. RM530.8m or 8 sen/share), (ii) we rollforward our valuation parameter to FY16E, our SoP-based Target Price is adjusted slightly downwards to RM7.55 from RM7.57 previously. This implies fwd-PER of 17.5x FY16EPS, in line with its historical 5-year PER range of 15-17x.

Risks to Our Call Lower-than-expected orderbook replenishment

 Slower-than-expected construction progress

 Higher-than-expected input costs.

 Lower-than-expected property sales

Source: RHB