FY18 CNP of RM409.2m came in below expectation, making up 88%/78% of our/consensus full-year estimates. A 3.0 sen dividend was declared, with full-year dividend at 6.0 sen, above our estimate of 5.1 sen. Lowered FY19E CNP by 7% and introduces FY20E CNP of RM514.0m. Maintain OUTPERFORM with a lower Target Price of RM2.30 (from RM3.35 previously).

Below expectations. FY18 CNP of RM409.2m came in below expectation, making up 88%/78% of our/consensus full-year estimates. We believe the negative variance stemmed from lower-than-expected margins from construction division and infrastructure division as we could have been slightly bullish on a recovery. Positively, a 3.0 sen dividend was declared, with full-year dividend at 6.0 sen, above our estimate of 5.1 sen.

Results highlight. FY18 CNP declined by 24% YoY despite a marginal decline in revenue (-1%). This is due to the decline in pre-tax profit for several divisions; Property (-64%), Industry (-42%) and Plantation (- 54%), for property revenue was down by 13% coupled with margin compression of 12ppt to 9%, as industry margins were weaker due to sales of lower margin products, while plantation was bogged down by higher unit costs. QoQ, 3Q18 CNP was down 41% mainly dragged down by its plantation division, which saw both revenue and pre-tax profit declining by 37% and 94%, respectively.

Outlook. IJM’s outstanding order-book currently stands at c.RM9.4b, while its property unbilled sales are c.RM2.0b with visibility for the next 3-4 years. As for its plantation division, its Indonesian operations are seen to be affected by “start-up yields whilst incurring full plantation maintenance costs and overheads”, leading to thinner margins in its overseas business. Nevertheless, our planation analyst expects production to continue its up-trend, with double-digit growth in Indonesia to push group production beyond the 1.0m MT landmark (+11% in our estimate), leading to the improvement in cost structure.

Earnings downgrade. Post results, we lowered our FY19E CNP by 7% after adjusting for lower margins for its construction and infrastructure division, while introducing our FY20E CNP of RM514.0m.

Maintain OUTPERFORM. Despite the uninspiring outlook on the construction sector due to several scrapped mega projects, coupled with the downgrade in earnings and widening of discounts, which resulted in a lower SoP-driven Target Price of RM2.30 (from RM3.35 previously), we reiterate our OUTPERFORM call on IJM as it is backed by a robust outstanding order-book and unbilled sales. Furthermore, the stock is currently trading at historical 5-year low at 0.7x FY19E PBR.

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

Source: Kenanga Research - 31 May 2018