Kenanga Research & Investment

IJM Corporation - Looking Constructive

Publish date: Tue, 29 Aug 2023, 09:45 AM

IJM’s 1QFY24 results met expectations. Its 1QFY23 net profit declined 13% YoY but we are unperturbed given stronger quarters ahead on the acceleration of work progress and the rollout of public infrastructure projects. Its construction outstanding order book stands at RM4.9b with unbilled property sales at RM2.5b. We maintain our forecasts but raise our TP by 5% to RM1.75 (from RM1.67). Maintain MARKET PERFORM.

IJM’s 1QFY24 core profit of RM66.4m made up only 20% and 19% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as we expect stronger quarter ahead as construction work progress improves. No dividend was declared during the quarter as expected.

YoY. Its 1QFY24 revenue rose 14% on a broad-based improvement across segments with construction (+14%) led by higher billings; property development (+7%) driven by stronger sales; manufacturing and quarrying (+23%) attributed by higher deliveries of piles, quarry and ready-mixed concrete; and, infrastructure (+15%) driven by higher cargo throughput at the port. However, its core profit contracted 13% to RM66.4m mainly due to: (i) higher interest expenses, tax and reversal of deferred tax assets.

QoQ. Its 1QFY24 revenue fell 8% mainly due to a 35% sequential decline in property revenue from a high base in 4QFY24 (boosted by sale of an industrial land parcel in Bandar Rimbayu). Its core profit contracted 41% for the same reason.

Outlook. We expect a significant revitalisation of the construction sector in 2HCY23 backed by: (i) the roll-out of the RM45b MRT3 project and six flood mitigation projects reportedly to be worth RM13b, and (ii) an accelerated disbursement of the massive RM97b gross development expenditure budgeted under Budget 2023 (+35% YoY over RM71.6b a year ago). Similarly, the private sector construction market is vibrant underpinned by massive investment in new semiconductor foundries and data centres. We understand that IJM is also eyeing work packages from ECRL and various projects in East Malaysia and Indonesia. As of Mar-2024, its outstanding orderbook stood at RM4.9b, of which RM650m was newly secured in 1QFY24. For its property segment, it has unbilled sales of c.RM2.5b.

Forecasts: Maintained

However, we raise our SoP-derived TP by 5% to RM1.75 (see Page 3) from RM1.67 as we roll forward our valuation base year to FY24F (from FY23F). We continue to value its construction business at 13x forward PER, at a discount to 16x-18x we ascribed to large and mid-sized construction companies to reflect IJM’s higher exposure to the high-rise 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 5).

We continue to like IJM for: (i) the improved outlook of the construction sector with the imminent roll-out of public infrastructure projects, (ii) its strong earnings visibility underpinned by an outstanding construction order book of RM4.9b and unbilled property sales of RM2.5b, and (iii) Kuantan Port’s position as the largest port in the East Coast capturing export and import activities growth.

However, we remain cautious over the restructuring of Besraya and its loss-making toll roads namely the West Coast Expressway (WCE) and Kajang−Seremban Highway (also known as Lekas) due to low traffic volumes. Maintain MARKET PERFORM.

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 - 29 Aug 2023

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