1QFY23 results came within expectations. We believe IJM’s operations will not be spared the cost pressures arising from a high inflation environment, and hence, a return of its margins to pre-pandemic levels is likely to be thwarted. We maintain our forecasts but reduce the SoP-based TP by 8% to RM1.75 (from RM1.90) as we rationalise our valuation for its property segment to RNAV (from PBV). Maintain MARKET PERFORM.

Within expectations. 1QFY23 CNP of RM78m (after adjusting for RM45m forex losses) came within expectations at 25% and 23% of our and consensus estimates, respectively.

YoY, despite 1QFY23 revenue only rising marginally by 4%, its PBT rose 95% on much stronger margin from its property, manufacturing and toll-road segments (which were severely hit by the pandemic a year ago). Consequently, CNP bounced back to the black from a loss position.

Outlook. YTD, IJM has yet to secure any new jobs against our full year assumption of RM1.9b and the company’s FY23F internal target of RM3b. Nonetheless, we are keeping our assumption as IJM stands a good chance of securing at least one MRT3 package which we anticipate could come through by 1Q 2023. It is also eyeing hospital jobs and ECRL work packages. As at end-June 2022, its outstanding orderbook stood at only RM3.94b vs. a peak of RM9.4b during the last upcycle in 2019.

It is on track to meet its FY23F property sales target of RM1.8b (as well as our assumption of RM1.7b) with property sales of RM400m in 1QFY23. As at end-June 2022, its unbilled sales were healthy at RM2.4b. IJM has earmarked RM1.5b worth of launches in FY23, predominantly in the Klang Valley.

Kuantan Port’s 1QFY23 cargo throughput of 5.3m tonnes is currently trailing our full-year assumption of 25m tonnes, weighed down by slower exports to China by its key client, Alliance Steel, due to disruptions to economic activities arising from lockdowns pursuant to Beijing’s zero-Covid policy. Meanwhile, traffic levels at IJM’s toll roads (Lekas, NPE, Besraya) have reverted to pre pandemic levels. There could potentially be a takeover by the government of these highways as in the case of GAMUDA.

We believe IJM’s operations will not be spared cost pressures amidst a high inflation environment, and hence, a return of its margins to pre-pandemic levels is likely to be thwarted.

We maintain our forecasts but reduce our SoP-based TP by 8% to RM1.75 (from RM1.90) as we rationalise our valuation for its property segment to a 65% discount to RNAV (in line with 60-65% of its peers), from 0.35x PBV previously. No change to our 13x PER valuation for its construction business, at a discount to 16-18x we ascribe to peers to reflect IJM’s higher exposure to the office building segment which is weighed down by an oversupply situation. There is no adjustment to TP based on its 3-star ESG rating as appraised by us (see Page 4). Maintain MARKET PERFORM.

Key downside risks for our call are: (i) sustained weak construction jobs flow, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rise in cost of building materials.

Source: Kenanga Research - 25 Aug 2022