1Q17 CNP of RM121.4m was below expectations, accounting only 19%/18% of our/streets’ full-year estimates. The disappointment was driven by higher-thanexpected operating costs and weak performance from its infrastructure division owing to the bauxite mining ban. No dividends declared as expected. FY17-18E core earnings both lowered by 13%. Maintain MARKET PERFORM with a lower Target Price of RM3.51 (previously, RM3.66).

Below expectations. 1Q17 CNP of RM121.4m came in below expectations, accounting for only 19% and 18% of our and streets’ estimate, respectively. The weaker-than-expected performance stemmed from its property and infrastructure division weak performance owing to the slow property market which further drove its margins down due to higher sales and marketing costs while its infrastructure division was heavily impacted by the bauxite ban moratorium. Property sales wise, it is still on track to meet our target of RM1.5b as they registered RM330.0m sales for 1Q17. No dividend as expected.

Result Highlights… 1Q17 CNP was down by 14%YoY despite registering a double-digit growth of 11% in revenue. The main drag in earnings was due to the decline in performance from several divisions namely property, industry, and infrastructure, which saw pre-tax profits decline of 9%-72%. The reasons are:(i) higher sales and administrative cost from its property marketing activities owing to a challenging property market, (ii) decline in quarry revenue due to slowdown in demand, and (iii) moratorium ban on bauxite, which caused a 68% drop in throughput volume in Kuantan Port.

Looking ahead. Currently, IJM’s outstanding orderbook and unbilled sales stand at c.RM8.0b 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 and LRT3. We remain hopeful that they would be able to bag at least one more job from these two projects given their strong track records in infrastructure works.

Earnings downgrade. Following its weaker than expected 1Q17 performance, we are reducing our FY17-18E core earnings down by 13% to RM549.5m and RM612.0m, respectively, as we lowered our margin assumptions for its property and infrastructure division accordingly due to higher-than-expected costs which we failed to account for previously.

Maintain MARKET PERFORM. Following the downgrade in earnings, we also lowered our SoP-driven TP to RM3.51 (from RM3.66). Nonetheless, we are still keeping our MARKET PERFORM recommendation on the stock as we believe that the weakness in the property market, infrastructure division and also plantation sector will be offset by potential positive news flow from the construction sector.

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) delays in construction works.

Source: Kenanga Research - 25 Aug 2016