Period

2Q16/1H16

Actual vs. Expectations

1H16 core net profit (CNP) of RM304.7m came in broadly inline with our and streets estimates with a fulfillment rate of 44%. We deem that results to be broadly inline as we would expect its construction division to pick up pace in 2H16, which would negate the potential earnings risk from its plantation division.

Dividends

3 sen dividend was declared, as expected.

Key Results Highlights

YoY, 1H16 net profit of RM493.2m saw a substantial increase by 101%, despite the decline on its topline (- 5%) mainly driven by the recognition of the one-off gain arising from the disposal of its 74% equity stake in Jaipur Mahua Tollway. Should we exclude one-off tollway disposal gain and forex translation gains, IJM would register core net profit of RM304.7m (+13%), due to the improvements in financing cost (-12%), decline in minority interest contribution (-51%), coupled with a lower effective tax rate of 16% vis-à-vis 29% for 1H15.

QoQ, 2Q16 core net profit grew by 16% to RM163.6m was in tandem with its revenue growth of 13% driven by the growth coming its construction (+69%) and infrastructure (+22%) division.

Outlook

IJM’s outstanding orderbook still stands at c.RM7.0b, and coupled with unbilled sales of RM1.7b, the group has at least two years of earnings visibility. That aside, IJM is positive on the construction sector outlook as they would be eyeing almost all of the infrastructure jobs that are to be awarded next year, i.e. MRT2, LRT3, Pan Borneo, SUKE, and DASH.

However, we remain cautious on the property sector given the current market conditions and do not see any near-term catalyst for the stock.

Change to Forecasts

Following the earnings downgrade on its plantation division by our plantation analyst and the tweak in our construction margins, we lowered our FY16-17E earnings lower by 9.1%-7.6% to RM622.4m-RM680.0m, respectively.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate MARKET PERFORM on IJM with a higher Target Price RM3.50 (previously, RM3.48) based on SoP, following the upgrade in IJMPLNT’s Target Price from RM3.50 to RM3.64. Our TP implies FY17E PER of 18x, which is still inline with our target for big cap’s Fwd- PER of 16x-18x.

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 - 25 Nov 2015