We are positive on the RM1.58b cash offer KLK has made to acquire IJM’s stake in IJMPLNT as it is 39% higher than our ascribed value for IJMPLNT. Also, with such sizeable cash proceeds, we believe IJM would be well positioned to take on incoming PFI related projects and also dish out a special dividend post deal. Nonetheless, FY23E earnings would reduce by 14% after stripping off IJMPLNT’s contributions. All in, maintain OP with higher TP of RM2.35 (from RM2.20) after factoring for the higher-than-expected value derived from IJMPLNT.

An unexpected offer. KLK has made a cash offer to purchase IJM’s 56.2% stake in IJMPLNT for RM3.20*/IJMPLNT’s share (or RM1.58b). The offer price values IJMPLNT’s 61k hectares of lands (spread across Sabah, Sumatra and East Kalimantan) at RM54k/ha – a fair price in our opinion.

*RM3.10 offer + RM0.10 dividend declared by IJMPLNT to be paid on 30 July 2021

This cash deal effectively translates to RM0.44 per IJM share. Based on announcements made, while the deal is still not casted in stone, IJM has agreed in principle.

A good deal with potential gains of RM727m. We are positive on the RM3.20 cash offer made as it is 39% higher than our RM2.30 ascribed value for IJMPLNT. Against IJMPLNT’s RM1.63 BV/share, IJM would recognise a potential gain of c.RM727m (or RM0.20/IJM share).

Beefed up war chest for PFI projects. We believe these fresh proceeds could be channelled to spearhead PFI (private finance initiative) related projects and shore up IJM’s current outstanding orderbook of RM4b given the government’s weaker fiscal position post Covid-19 pandemic. Note that current orderbook has shrunk from its peak orderbook of RM8.8b registered in FY19.

Net gearing to decline to 0.23x post deal. Prior to this deal, IJM’s net gearing was already comfortable at 0.45x against its past 5 years’ net gearing of 0.36x – 0.54x. Post deal, IJM’s net gearing would come off further to 0.23x. While some proceeds could be earmarked for PFI, we still believe there is room for special dividends to be made. Historically, IJM has paid out special dividends after recording gains from their asset disposals*. Assuming a 20 sen special dividend being paid, IJM’s net gearing would still remain comfortable at 0.31x.

*IJM had paid out special dividends in FY14 and FY16 from gains in disposal of assets at Kemaman Port, Trichy Highway, Kuantan Port (40%), Swarna toll (70%) and Jaipur Manua Toll.

FY23E earnings adjusted lower by 14% after excluding IJMPLNT’s contribution. We assume the deal would only materialise late FY22 – hence we only strip off IJMPLNT’s earnings contribution starting FY23E. In our assumption, we have allocated RM0.20/share (RM727m) for special dividends and the rest (RM856m) to pare down borrowings – effectively saving on c.RM34m worth of financing costs.

Keep Outperform with higher SoP-TP of RM2.35 (from RM2.20) after factoring for the higher-than-expected value derived from IJMPLNT.

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 - 10 Jun 2021