9MFY20 CNP of RM194.8m (-36% YoY) only accounted for 59%/49% of our/consensus full-year estimates. All business segments showed better YoY contributions except the construction division. We have adjusted down our earnings forecasts by 15% for FY20 and 19% for FY21. Downgrade to MP with a lower SoP-based TP of RM2.15 (from RM2.35).

Below expectations. 9MFY20 CNP of RM194.8m (-36% YoY) represented only 59%/49% of our/consensus full-year expectations. The overall performance was mainly dragged by lower-than-expected contributions from the construction and manufacturing & quarrying divisions. No interim dividend was declared in 3QFY20, as expected.

Results’ highlight. 9MFY20 CNP disappointed mainly attributable to: (i) the construction division which contributed pretax profit of RM107.6m (-4% YoY) despite slightly higher turnover of RM1.59b (+4% YoY) as margin slipped from 7.3% to 6.7%, and (ii) manufacturing & quarrying segment’s pretax profit contribution of RM46.2m (+5% YoY). On the positive side, the other main businesses, namely property development (+11% YoY to RM146.6m), plantations (turned around from –RM60.0m to +RM23.0m) and infrastructure (+11% YoY to RM107.2m) all saw stronger pretax profit contributions YTD.

QoQ, 3QFY20 CNP rof RM46.7m was 2% higher but 33% down YoY. This was mainly dragged by lower pretax profit contributions from the construction (-17% YoY), manufacturing & quarrying (-12% YoY), and infrastructure (-57% YoY) divisions.

Outlook. Forward earnings will be driven by current construction order book of RM4.5b, unbilled property sales of RM1.9b and stronger plantation contributions on the back of higher CPO prices.

Earnings adjustments. We have trimmed our CNP to RM281m (-15%) for FY20 and RM320m (-19%) for FY21 after tweaking our progress billings and sales and margin assumptions mainly for the construction and manufacturing & quarrying divisions.

Downgrade to MARKET PERFORM with a SoP-based TP of RM2.15 (from RM2.35). While we like IJM for its diversified earnings base, the stock fundamentals is clouded by the prevailing challenging market conditions for the construction and property sectors.

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) slower-than-expected progress in construction works and clearing of property inventories.

Source: Kenanga Research - 26 Feb 2020