1H18 CNP of RM241.3m came in below expectations, making up 41%/37% of our/street’s full-year estimates, due to weaker-than-expected property margins and higher-than- expected unit costs from IJMPLNT. A 3.0 sen dividend declared as expected. Lowered FY18/19E CNP by 11%/12%. Maintain OUTPERFORM with a lower Target Price of RM3.45.

Below expectations. 1H18 CNP of RM241.3m came in below expectations, making up 41%/37% of our/street’s full-year estimates. The disappointment stemmed from; (i) weaker-than-expected property development margins, and (ii) IJMPLNT’s slow production recovery in Sabah leading to higher-than-expected unit costs. A 3.0 sen dividend declared made up 52% of our full-year estimate which is in line.

Results highlight. 1H18 CNP declined by 10% YoY despite a healthy revenue growth of 9%. This is due to the decline in pre-tax profit for two of its divisions i.e. Industry (-25%) and Plantation (-58%), as margins were weaker underpinned by sales of lower margin products for industry, while plantation was bogged down by higher unit costs. QoQ, 2Q18 CNP was down 14% due to: (i) higher interest expenses (+12%), (ii) higher effective tax rate of 32% (+5ppt), and (iii) lower contributions from associates which registered losses of RM3.0m vis-à-vis profits of RM17.3m in 2Q17.

Outlook. IJM’s outstanding order-book currently stands at RM9.4b, while its property unbilled sales are RM1.9b 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) for now. To recap, they have secured RM2.7b worth of jobs for FY18 and we believe that there is a good chance for them to achieve their RM3.0b target as 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.

Earnings downgrade. Post results, we lowered our FY18/19E CNP by 11%/12%, respectively after factoring in lower margins for its property development division coupled with higher unit cost assumptions for IJMPLNT.

Maintain OUTPERFORM. Despite our downgrade in earnings which resulted in a lower SoP-driven Target Price of RM3.45 (previously, RM3.48), we reiterate our OUTPERFORM call on IJM. We believe that its outlook is improving on its diversified infrastructure business, i.e. Kuantan Port is slowly gaining momentum as they just recently signed a contract with New Ocean Energy (Malaysia) Sdn Bhd to develop a new oil refinery complex, with further re-rating catalyst should they are able to secure the LRT3 job this year. Our Target Price implies a FY19E PER of 21.5x, which is close to its 5-year Avg. Fwd. PER levels.

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

Source: Kenanga Research - 29 Nov 2017