News  IJM announced that it has entered into a conditional Share Purchase and Debenture Subscription Agreement (SPDSA) to dispose its 100%-owned Jaipur-Mahua Tollway Private Limited (JMTPL), to ISQ Asia Infrastructure I-A Private Limited (IIA) for INR5.25b (approximately RM295m). The disposal is subject to closing audit and adjustments pursuant to the SPDSA.

 The disposal will be initially for 74% of the equity shares and the balance 26% of the equity shares shall be disposed of upon obtaining the approval from the National Highways Authority of India.

Comments  We were positively surprised with the news as: (i) we estimate IJM is selling the highway at 2.76x PBV as the group mentioned that it estimated a gain of RM188m after selling the highway. We expect the gain will be booked as early as 4Q15. Hence, our SoP valuation would also be increased by 11 sen/share to RM7.66 from current RM7.55 as we have only imputed in 1.0x PBV for all of its Indian highways.

 IJM’s balance sheet will improve. Post-disposal, after removing approximately RM200m worth of borrowings attached to this highway and adding the cash proceeds, we expect IJM’s net gearing to improve to 0.39x from 0.45x as at 2Q15,

 Cash proceeds received could potentially lead to higher dividend next year as we see no major capex plan for IJM after the SILK highway deal was called off recently. Currently, we only estimate IJM to pay 15 sen DPS in FY16. Assuming half of the gains will be distributed to shareholders, our DPS would be raised to 20 sen. This implies to a decent gross 3.0% yield.

Outlook  Remains bright in the short-long-term. We reaffirm our view that IJM is in the midst of entering a new phase of growth as almost all of its businesses are in “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 for at least 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.

Forecast  Our earnings forecasts are relatively unchanged as this highway is not a significant contributor to the group’s

bottomline. However, we raise our dividend estimates to 20 sen for FY16 as we expect this disposal to lead to higher dividend next year.

Rating Maintain OUTPERFORM

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

Valuation  We raised our SoP-based Target Price to RM7.66 (from RM7.55 previously) after IJM managed to fetch higher valuation for this highway vis-à-vis our valuation. Our TP implies 17.7x FY16 PER, in line with its historical 5-year PER range of 15-18x.

Risks to Our Call Lower-than-expected orderbook replenishment, slowerthan-expected construction progress, higher-than-expected input costs and lower-than-expected property sales.

Source: Kenanga