Kenanga Research & Investment

IJM Corporation - Recovery Across the Board

Publish date: Fri, 24 Feb 2023, 09:44 AM

IJM’s 9MFY23 results met expectations with most of its business units showing recovery. While we believe IJM is a strong contender for MRT3 work packages given its solid track record in the local rail space, it increasingly appears that the award may not happen within its current financial year. We maintain our forecasts, TP of RM1.67 and MARKET PERFORM call.

Within expectations. 9MFY23 core net profit of RM226m (after adjusting for forex loss, impairment of assets and gain from investment disposals) came within expectations at 73% and 74% of our full-year forecast and the full-year consensus estimate, respectively.

9MFY23 revenue was marginally lower YoY minus its plantation division which was sold last year. However, PBT almost doubled on improved profitability as all business units except construction rebounded from a pandemic-stricken period a year ago. Its construction contribution was weaker on lower progress billings as major projects were completed in the previous year while most ongoing jobs are still at its initial stages of progress.

YTD, IJM has only secured RM0.93b worth of new construction contracts, trailing our assumption of RM1.9b and its own target of RM3.0b. IJM’s biggest prize target is the MRT3 work packages that appear increasingly unlikely to come in within IJM’s current financial year. We believe IJM is a strong contender for MRT3 work packages given its solid track record in the local rail space. It is also eyeing work packages in the followings: (i) ECRL, (ii) the semiconductor space, and (iii) highways in India. Its outstanding order book stood at RM4.6b as at end-3QFY23.

9MFY23 property sales of RM1.4b (excluding RM1b land sales from London and Kuantan) are on track to meet our assumption of RM1.7b and its own target of RM2b. The company will continue to focus on asset monetisation through land disposals and property sales within its local township projects. Its unbilled property sales stood at RM3.4b as at end-3QFY23.

Kuantan Ports’ 9MFY23 throughput of 17m tones is on track to meet our full-year assumption of 23m tonnes. That said, we do not anticipate strong growth for this unit in the foreseeable future due to weaker throughputs from its largest client Alliance Steel being hampered by weaker steel demand from China.

We maintain our earnings forecasts and SoP-based TP of RM1.67 on unchanged 13x PER valuation for its construction business, at a discount to the 16-18x we ascribed to its peers to reflect IJM’s higher exposure in the office building segment which is weighed down by an oversupply situation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like IJM for: (i) being a proxy to the rollout of public infrastructure projects, (ii) its healthy balance sheet with gearing of 0.2x which enables them to gear up for PPP/PFI initiatives i.e. MRT3, and (iii) Kuantan Port’s position as the largest port in the east coast capturing export/import growth. However, we remain cautious over their loss making toll roads namely West Coast Expressway (WCE) and Lekas. Hence, we maintain it at MARKET PERFORM.

Key downside risks to 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 - 24 Feb 2023

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