Yesterday, IJM announced that they have secured a construction job from Damansara Uptown Retail Centre Sdn Bhd amounting to RM378.2m. The construction work spans 39 months with delivery expected in early 2021. We are NEUTRAL on the win as it is within our FY18E order-book replenishment of RM3.0b. However, we upgrade our call to OUTPERFORM from MARKET PERFORM with an unchanged SoP-driven Target Price of RM3.48 as we believe the recent share price retracement provides a good opportunity to accumulate on weakness.

Bags another building job. Yesterday, IJM secured a contract award amounting to RM378.2m from Damansara Uptown Retail Centre Sdn Bhd (DURC) for the design, construction, completion and commissioning of a 31-storey office tower with three (3) levels basement car park. The construction works for the office tower is expected to take 39 months targeted to complete by early 2021.

Neutral on the win. This is the third contract win for IJM in FY18. However, we are neutral with the contract award replenishment of RM378.2m as it is well within our FY18E construction order-book replenishment target of RM3.0b. To date, its order-book replenishment of RM1.2b makes up 41% of our target with a remainder of RM1.8b to be achieved for FY18. Assuming pre-tax margin of 10%, the contract is expected to contribute RM8.7m to its bottom-line per annum.

Outlook. IJM’s outstanding order-book currently stands at c.RM9.5b (previously, RM9.1b), while its property unbilled sales stand at RM1.7b with visibility for the next 3-4 years. We continue to maintain our FY18E order-book replenishment target of RM3.0b (in line with management) as we believe that the local job prospects remain positive, underpinned by contracts from Pan Borneo Sabah, Kuantan Port infra works, building jobs from the private sector, and also ECRL.

Estimates unchanged. We make no changes to our FY18-19E earnings as the contract win is within our order-book replenishment of RM3.0b for FY18.

Upgrade to OUTPERFORM. The move by a turnkey contractor of MRT3 of replacing Project-Delivery-Partner (PDP) model to a “build and finance” one has sent shock-waves to the market, causing big-cap contractors’share prices, i.e. GAMUDA and IJM, to take a beating. That said, the weakness in IJM’s share price could be due to the potential exclusion from FBMKLCI. However, we believe the reduced role of a PDP should not affect players like IJM given its focused role as a main contractor over PDP. Furthermore, its diversified infrastructure business i.e. Kuantan Port is slowly gaining momentum as they just recently signed with NewOcean Energy (Malaysia) Sdn Bhd to develop a new oil refinery complex. Hence, we are upgrading our call on IJM to OUTPERFORM (previously, MARKET PERFORM) with an unchanged SoP-driven Target Price of RM3.48 as we believe the recent retracement in share price provides a good opportunity to accumulate on weakness. Our TP implies a FY19E PER of 19.2x, which is at its 5- year Fwd PER -0.5SD level.

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

Source: Kenanga Research - 14 Nov 2017