Kenanga Research & Investment

IJM Corporation - Out of the Doldrums

Publish date: Fri, 01 Dec 2023, 11:57 AM

IJM’s 1HFY24 results beat expectations mainly due to land sales gains, which also anchored a 40% YoY jump in 1HFY24 core net profit. YTD, its construction job wins stand at RM2.7b (vs. its FY24F internal target and our assumption of RM3b). We raise our FY24-25F net profit forecasts by 15% and 26%, respectively, lift our TP by 7% to RM2.31 (from RM2.15) and maintain our OUTPERFORM call.

IJM’s 1HFY24 core profit of RM206.4m beat expectations at 62% and 59% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from gains from the sale of two parcels of industrial land in Bandar Rimbayu in 2QFY24. It declared the first interim NDPS of 2.0 sen (ex-date: 15 Dec; payment date: 29 Dec), which is the same as the 2.0 sen paid in 2QFY23.

YoY. Its 1HFY24 revenue leapt 25% on a broad-based improvement across all segments; with construction (+35%) led by higher work activities, property development (+24%) attributed by strong property sales as well as the said sale of industrial land, manufacturing & quarrying (+23%) driven by higher deliveries of piles, quarry and readymixed concrete, and infrastructure (+13%) due to higher cargo throughput at the port.

Meanwhile, its core profit jumped 40% to RM206.4m, thanks largely to strong property development earnings (+149%) which was driven by higher sales, improved margin on product mix as well the said sale of industrial land with gain of c.RM20m. However, construction earnings fell 40% on higher raw material and prolongation cost, while new projects at initial stages led to lower margins.

QoQ. Its 2QFY24 revenue grew 19% mainly led by construction (+35%) on higher billing and property development (+25%) on higher property sales as well as the said sale of industrial land. Consequentially, its 2QFY24 core profit more than doubled.

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

1. YTD, the job wins at its construction unit stand at RM2.7b, which is on track to meet its FY24F internal target and our assumption of RM3b. We understand that the validity for tenders for work packages for MRT3 is still good until Dec 2023.

2. The property division recorded new sales of RM851m in 1HFY24, vs. its FY24F internal target and our assumption of RM2.5b and RM2b, respectively. It will put onto the market RM1.46b worth of new property launches in 2HFY24 mainly in Penang (such as Lightwater Residences Condominium priced at RM2.4m on average per unit) and Seremban (Aman Sutera 2-storey link home priced at RM877k on average per unit and Vio Banj’ran 3-storey bungalow at RM4.5m on average per unit). Its unbilled sales stand at RM2.5b currently.

3. Kuantan Port reported PBT of RM66.8m in 1HFY24 vs. RM14.3m in 1HFY23 largely due to a +14% tariff revision in April 2023. Kuantan Port’s 1HFY24 throughput was 12.7m which was higher than that of 11m in the same period last year.

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project, RM9.5b Bayan Lepas LRT and six flood mitigation projects reportedly to be worth RM13b, and (ii) the vibrant private sector construction market, 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.

Forecasts: We raise our FY24-25F earnings forecasts by 15% and 26%, respectively, to reflect: (i) the sale of industrial land in 2QFY24, and (ii) a stronger pick-up in construction earnings (on easing input cost) and property profits (on higher progress billings). Similarly, we also raise our FY24-25F NDPS to 8.0 sen each from 6.0-7.0 sen previously.

We lift our SoP-driven TP by 7% to RM2.31 (see Page 3) from RM2.15 previously, on unchanged 18x PER valuation for its construction business, which is in-line with our valuation for big cap construction companies, i.e., GAMUDA (OP; TP: RM5.45) and SUNCON (OP; TP: RM2.26). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like IJM for: (i) it is poised to garner a slice of action in the imminent mega rail projects, i.e., MTR3 and Bayan Lepas LRT given its involvement in the previous MRT and LRT projects, (ii) its strong earnings visibility underpinned by an outstanding construction orderbook of RM6.4b 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. Maintain OUTPERFORM.

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) rising cost of building materials.

Source: Kenanga Research - 1 Dec 2023

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