News

IJM announced yesterday that it is disposing its 98.5% effective stake in Swarna Tollway Private Limited (STPL) to MAIF Investment India 3 Pte Ltd (MAIF) for RM596.8m.

According to the announcement, IJM, through its wholly-owned subsidiary, IJM Investment (M) Limited is selling its 70% stake in STPL for RM407.8m to MAIF. Also, a 95%-owned subsidiary of IJM, CIDB Inventures Sdn Bhd (CIDBI) which owns the remaining 30% in STPL, will also dispose to MAIF for RM189.0m. However, the latter’s disposal is subject to obtaining the necessary approvals from the authorities within 42 months from the completion of the former’s disposal.

Comments

We are positive on the announcement as: (i) we estimate net gain from the disposal of the entire 98.5% stake will be more than RM100.0m, and (ii) earnings-wise, the highway’s normalized earnings is not material at less than RM10.0m per annum or mere a 1.3% of FY16E earnings. Hence, there should be no concern over earnings loss from the highway and (ii) we do not rule out the possibility that part of the proceeds from the disposal could be channelled to special dividend as was the case in FY14. Recall, IJM paid special dividend after disposing some of its assets (about RM640.0m in value) in FY14. The group also has relatively stable financial position with net gearing of 0.5x. Assuming the group distributes 20% of the 70%- stake disposal proceeds of RM407.8m as special dividend, IJM may announce extra DPS of 4.5-5.0 sen on top of its regular dividend payment. In total, the group may announce 20.0 sen DPS in FY16, representing 2.8% dividend yield.

Outlook

Despite the potential special dividend, we remain concerned over the group’s near-medium-term earnings outlook due to its property segment. The slowdown in the property sector has started hurting the group’s bottomline. Property segment contributes almost half of the group’s pre-tax earnings. To recap, the group’s FY15 earnings came in below expectations largely due to lowerthan- expected property earnings.

Forecast

Relatively unchanged.

Rating

Maintain MARKET PERFORM

Valuation

Tweaked our SoP-based TP higher to RM7.00 (from RM6.90 previously) after the positive adjustments on Swarna tollway’s book value. We had previously underestimated the highway’s book value. Our TP implies FY17E PER of 16.1x, in line with our target for big cap’s Fwd-PER of 16x.

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: Kenanga Research - 22 Jul 2015