9M18 CNP of RM347.2m came in below expectations, at 66%/57% of our/street’s full-year estimates, on (i) weaker- than-expected property development margins, (ii) IJMPLNT’s slow production recovery in Sabah leading to higher-than-expected unit costs, iii) lower-than-expected industrial margins, and (iv) higher-than-expected tax rates. No dividend declared as expected. Lowered FY18/19E CNP by 12%/12%. Maintain OUTPERFORM with a lower Target Price of RM3.35.

Below expectations. 9M18 CNP of RM347.2m came in below expectations, making up 66%/57% of our/street’s full-year estimates. The disappointment stemmed from; (i) weaker-than-expected property development margins, (ii) IJMPLNT’s slow production recovery in Sabah leading to higher-than-expected unit costs, iii) lower-than- expected industrial margins, and (iv) higher-than-expected tax rates. No dividend declared, as expected.

Results highlight. 9M18 CNP declined by 14% YoY despite a healthy revenue growth of 5%. This is due to the decline in pre-tax profit for several divisions; Industry (-35%) and Plantation (-43%), for industry margins were weaker due to sales of lower margin products, while plantation was bogged down by higher unit costs. Positively, we saw a mild improvement of 3% in its property development pre-tax profit (after adjusting for forex losses of RM9.6m in 9M18 and forex gain of RM0.2m in 9M17) QoQ, 3Q18 CNP was down 5% due to: (i) the decline in performance for its construction, property, and industry division which registered decline in pre-tax profits ranging between 17%-30%, and (ii) higher effective tax rate of 36% (+4ppt).

Outlook. IJM’s outstanding order-book currently stands at c.RM9.0b, while its property unbilled sales are c.RM1.5b 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 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 12%/12% after adjusting for lower margins for its property development and industry division coupled with higher unit cost assumptions for IJMPLNT.

Maintain OUTPERFORM. Despite the downgrade in earnings which resulted in a lower SoP-driven Target Price of RM3.35 (previously, RM3.45), we reiterate our OUTPERFORM call on IJM. We believe that its outlook remains promising given their strong interest in the mega infrastructure space, i.e. ECRL, LRT3, MRT3 and HSR. While GAMUDA is a strong player in rail-related projects, we believe that IJM could stand a chance in winning the PDP role for HSR given its strong track record in the construction scene. That said, 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. Our Target Price implies a FY19E PER of 23.6x, which is close to its 5-year Avg. Fwd. PER level.

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

Source: Kenanga Research - 28 Feb 2018