9M19 CNP of RM287.9m came in below expectations, making up 64%/66% of our/consensus full-year estimates. The negative variance stems from: (i) third quarterly earnings disappointment from IJMPLNT arising from lower- than-expected FFB output, and (ii) higher-than-expected tax. No dividends declared, as expected. Slashed FY19-20E CNPs by 19-6%, respectively. Downgrade to UP with a lower SoP-driven TP of RM1.80 (previously, MP; TP: RM1.85).

Below expectations. 9M19 CNP of RM287.9m came in below expectations, making up 64%/66% of our/consensus full-year estimates. The negative variance stems from: (i) third quarterly earnings disappointment from IJMPLNT arising from lower-than- expected FFB output, and (ii) higher-than-expected tax. No dividends declared, as expected.

Results highlight. 9M19 CNP fell19%, YoY following (i) decrease in revenue (-8%), (ii) higher interest expense (+29%), and (iii) lower contribution from associates (-10%). On segmental basis, all of its divisions registered decline in revenue ranging between 13-54%, except for its infrastructure and property division, which grew 6-15%. Its construction pre-tax profit declined by 34% on weaker construction revenue (-13%) as its newer projects have yet to reach optimal billing stage. Industry division saw 36% decline in pre-tax on weaker revenue (-20%) due to the weak market sentiment and stiff competition. QoQ, 3Q19 CNP was down47% despite its revenue growing by 15% hit by: (i) higher interest cost (+21%), (ii) loss contribution from its associates, and (iii) sharp increase in tax (+216%).

Outlook. IJM’s outstanding order-book currently stands at c.RM8.4b, while its property unbilled sales are c.RM2.2b with visibility for the next 3-4 years, and management are on-track to meet our/their target sales of RM1.6b as they have registered RM1.2b sales in 9M19. As for its plantation division, we continue to expect high production costs to eat into profit margins in the near-term due to full overhead charges on very young estates in Indonesia. As for its industry division, management cited that it would remain challenging due to the subdued local demand and they are looking to diversify to overseas market.

Earnings downgrade. Post results, we cut our FY19-20E CNP by 19- 6%, respectively, after factoring in a lower contribution from its plantation division.

Downgrade to UP (from MP) with a lower SoP-driven TP of RM1.80, as we adjust our fair value for IJMPLNT and due to the recent share price rebound coupled with the uninspiring outlook on the sectors that IJM are involved in i.e. construction, property, industry, and plantation which have been hit by various reasons. Our TP implies FY19E PER of 17.8x which is above KLCON’s 5-year average of 13.4x.

Key upside risks for our call are: (i) higher-than-expected margins, and (ii) higher than expected progress in construction works.

Source: Kenanga Research - 27 Feb 2019