1Q19 CNP of RM133.8m is broadly in line, making up 28%/26% of our/consensus full-year estimates. No dividend declared, as expect. Lowered FY18-19E CNP by 3-2%. Maintain OUTPERFORM with a lower Target Price of RM2.15 (previously, RM2.20).

In line. 1Q19 CNP of RM133.8m after stripping out forex losses of RM71.0m came in broadly within expectation, making up 28%/26% of our/consensus full-year estimates. Plantation arm IJMPLNT missed earnings on weaker-than-expected FFB production, implying that other divisions, particularly property, did better than expected. No dividends declared, as expected.

Results highlight. 1Q19 CNP registered marginal growth of 3%, YoY despite a slight decline in revenue (-2%). We believe its property division drove the improvement, which registered higher revenue (+12%) coupled with better pre-tax margins of 13% (+5ppt) as a result of higher work progress and completion of some projects. QoQ, 1Q19 CNP was up 116% backed by marginal revenue growth of 3% where most of its core divisions registered revenue growth of 1-30% except for construction, which is down by 5%. Notably, the significant improvement stemmed from its property and infrastructure divisions as its property division registered 94% growth in pre-tax profit while its infrastructure division recorded pre-tax profit of RM24.9m vis-à-vis pre- tax loss of RM22.2m in 4Q18.

Outlook. IJM’s outstanding order-book currently stands at c.RM8.8b, 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 continue to be affected by “start-up yields whilst incurring full plantation maintenance costs and overheads”, leading to thinner margins in its overseas operations. Nevertheless, our planation analyst expects production to continue its uptrend, with double-digit growth in Indonesia to push group production beyond the 1.0m MT landmark (+11% in our estimate), which subsequently leads to the improvement in cost structure.

Earnings downgrade. Post results, we lowered our FY19-20E CNP by 3-2%, respectively, after lower contribution from its plantation division following the 20-9% cut in plantation earnings due to the 10-5% reduction in output forecasts.

Maintain OUTPERFORM. Despite the uninspiring outlook on the construction sector due to several scrapped mega project, and challenging operating environment for its plantation and infrastructure division, we reiterate OUTPERFORM call on IJM, albeit with a lower SoP-driven Target Price of RM2.15 (previously, RM2.20) as it is backed by a robust outstanding order-book and unbilled sales. The main reason for the lower TP is due to the downward revision for IJMPLNT’s TP to RM1.60 (from RM2.00). 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 - 29 Aug 2018