FY16 CNP of RM500.0m was below expectations, making up 81% of our/consensus full-year estimates. The disappointment was led by the poor performance of its plantation division coupled with overly aggressive construction billings assumptions. A 7.0 sen dividend was declared, with the full-year dividend of 10.0 sen short of our expectation of 15.0 sen and FY17E earnings reduced by 9%. Maintain MP with a higher TP of RM3.66 (previously, RM3.51).

Below expectations. FY16 CNP of RM500.0m came short of our and consensus expectations by 19%, led by the weaker-than-expected performance in its plantation division coupled with an overly aggressive construction billings assumptions. A 7.0 sen dividend was declared bringing its full-year dividend to 10.0 sen which is still below our expectations of 15.0 sen.

Slow billings, weak prices and low FFB volume… FY16 CNP was down by 10% despite improvements in pre-tax margins of +4ppt YoY coupled with a lower effective tax rate of 24%, mainly due to the 6% decline in revenue due to slower billings from its property division coupled with the combination of lower CPO prices, and weaker FFB volume registered by its plantation division.

QoQ, 4Q16 CNP climbed by 28% albeit a 19% slump in revenue mainly due to better improvements in: (i) associates contribution, (ii) lower interest expense, and (iii) lower minority interest contribution due to lower profit contribution from its plantation division.

Looking ahead. Currently, IJM’s outstanding orderbook and unbilled sales stands at c.RM8.5b and RM1.7b, respectively, providing earnings visibility at least for the next 3-4 years. Moving into 2HCY16, we are expecting more job awards for IJM underpinned by the project tenders that they have participated such as Pan Borneo Sarawak, LRT3, SUKE, and DASH. We are confident they will be able to bag at least two more jobs from the four above-mentioned projects given their strong track records in infrastructure works.

Reducing FY17E earnings by 9%, as we adjust our FY17E earnings in accordance to the downgrade in IJMPLNT’s earnings by our plantation analyst. That said, we also take the opportunity to introduce our FY18E earnings of RM700.9m.

Maintain MARKET PERFORM. Despite the downgrade in earnings and valuation for IJMPLNT, we are upgrading our SoP-driven TP to RM3.66 (from RM3.51) as we roll forward our valuation base year to FY18E. However, we are keeping our MARKET PERFORM recommendation on the stock due to the weakness in the property market and also plantation sector, despite the potential positive news flow from the construction sector. Furthermore, our TP of RM3.66 implies FY18E PER of 18.7x, which is slight higher compared to our targeted Fwd. PER for big-cap contractors of 16.0x-18.0x. Key downside risks for our call are: (i) below than expected margins, and (ii) delays in construction works.

Source: Kenanga Research - 27 May 2016