IJM’s FY23 results were bumped up by lumpy land disposal gains. After a lull in FY23, it is hopeful for construction job wins to accelerate on a strong flow of public infrastructure projects. Meanwhile, the prospects of its infrastructure division are subdued by weak contributions from its overseas highways while its Kuantan Port throughput is not spared the impact of the global slowdown. We maintain our FY24F earnings forecast, TP of RM1.67 and MARKET PERFORM call.

Above expectations. FY23 core net profit of RM339m (after adjusting for forex loss, impairments and gain from investment disposals) exceeded our forecast and consensus estimate by 9% and 20%, respectively. The variance against our forecast mainly stemmed from some RM62m gain from an industrial land sale in Bandar Rimbayu. A 6.0 sen dividend was declared in 4QFY23, which brings its full-year dividend payout to 8.0 sen, beating our forecast of 6.0 sen.

FY23 revenue was marginally lower YoY in the absence of its plantation division which was sold last year. However, its PBT improved substantially by 54% thanks to its property and manufacturing division which rebounded strongly from a pandemic-stricken period a year ago. That said, its construction contribution was weaker on lower progress billings amidst the lack of new replenishments as major projects were completed in the previous year while most ongoing jobs are still at initial stage of progress.

The key takeaways from its analyst briefing yesterday are as follows.

1. IJM only secured RM1.5b worth of new construction contracts in FY23, missing our assumption of RM1.9b and its target of RM3.0b. It attributed the disappointment to a slow public job flow and the deferment of the MRT3 work packages (bidders have been asked to extend the validity of their tenders to Jun 2023). Nonetheless, it remains optimistic over the immediate term, setting a replenishment target in RM3b in FY24 (which is consistent with our assumption). Aside from MRT3, it is also eyeing work packages from: (i) ECRL, (ii) East Malaysia – mainly Sarawak, and (iii) Indonesia. Its outstanding order book stood at RM4.5b as at end-FY23.

2. Its FY23 property sales of RM1.8b (excluding RM0.87b land sales from London and Kuantan) met our target of RM1.7b and its own target of RM2b. It sets a FY24 target of RM2b (versus ours of RM1.7b) backed by a launch pipeline of RM2.9b. As at end-FY23, its unbilled property sales stood at RM3.0b.

3. Kuantan Ports’ FY23 throughput of 22.7m tonnes met our full-year assumption of 23m tonnes. While there is a +14% tariff revision in April 2023, 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.

4. Despite its toll roads in Malaysia showing strong recovery post Covid, its overseas toll roads continued to be a drag to the division due to high borrowing and maintenance costs. Meanwhile its plan to partially monetize its Malaysian tolls are underway. However, on going discussions with the government may take some time.

5. With a healthy net gearing of 0.2x, it is exploring synergistic M&A deals, targeting downstream businesses which would enhance the margins of its existing business units.

Forecasts. We maintain our FY24F forecast and introduce FY25F earnings of RM311m. The YoY decline in FY25F earnings reflects the higher financing costs (on higher interest rates) and lower property and manufacturing margins amidst higher input costs.

Consequently, we maintain our SoP-based TP of RM1.67 (see Page 3) on unchanged 13x PER valuation for its construction business, at a discount to the 16x-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 roll-out 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), Lekas and its India highways. Maintain MARKET PERFORM.

Key risks to our call include: (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 - 30 May 2023