IJM’s FY24 results beat expectations. Its FY24 core net profit jumped 50% thanks to strong performance from Kuantan Port on tariff hikes and higher throughput, which more than cushioned weaker construction profits. It guided for RM5b construction job wins in FY25. We raise our FY25-26F net profit forecasts by 5% and 9%, respectively, lift our TP by 9% to RM2.77 (from RM2.54) and maintain our OUTPERFORM call

IJM’s FY24 core profit beat our forecast and the market consensus by 22% and 33% respectively. The variance against our forecast came largely from better-than-expected earnings from Kuantan Port and a lower-than-expected effective tax rate. It declared a NDPS of 6 sen, bringing full-year FY24 NDPS of 8 sen which is in-line with our forecast.

YoY. Its FY24 revenue rose 29% with better performance across all segments: construction (+57%) attributed to higher construction work activities, property development (+26%) led by sales of industrial land in 2QFY24, manufacturing & quarrying (+19%) driven by higher selling prices and sales volume for the piles business, and infrastructure (+11%) due to the recovery in cargo throughput at the port and tariff hikes effective Mar 2023.

Its core profit jumped by a sharper 50% thanks largely to higher profits from: (i) Kuantan Port following tariff hikes and a 15% in throughput to 26.2m tonnes, (ii) property development which included c.RM20m gains from the sale of industrial land, and (iii) the normalisation of its effective tax rate (from an exceptionally high level a year ago). This was partially offset by a contraction in construction profits, weighed down by West Coast Expressway (WCE) work packages impacted by work scope changes, rising building material costs and prolongation costs.

QoQ. Its 4QFY24 revenue rose 19% on the back of higher revenues from construction (+23%), property development (+39%) and infrastructure (+9%) but offset by lower revenue from manufacturing & quarrying (-6%). However, its core profit more than doubled driven largely by a sharply lower effective tax rate.

The key takeaways from its conference call yesterday are as follows:

1. In FY24, it secured a total of RM3.73b new construction jobs which has surpassed our assumption of RM3b, bringing its outstanding order book to RM6.0b.

2. It sets a target of RM5b job wins in FY25 (vs. our assumption of RM4.5b). It is eyeing, among others: (i) New Pantai Expressway (NPE) expansion (>RM1b), (ii) civil servant housing project in Nusantara (>RM1b), (iii) building jobs for semiconductor foundries and data centres (we understand that it is close to securing one data centre project soon), (iv) infrastructure projects such as Penang LRT Mutiara Lane, Blue Line for Kuching ART and Sarawak Sabah Link Road.

3. It posted property sales of RM2.12b in FY24 (vs. RM1.87b in FY23 and its unbilled sales stand at RM2.6b. Over the medium term, its overseas projects will contribute more meaningfully including: (i) Royal Mint Gardens Phase 2, and (ii) the 50:50 partnership with Network Rail to develop eight sites in London with a GDV of >GBP3b.

4. The PESTECH (Not Rated) acquisition is pending final condition precedent, on track for completion by Aug 2024.

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project 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 various projects in East Malaysia and Indonesia.

Forecasts: We raise our FY25-26F net profit forecasts by 5% and 9%, lifting our job win assumptions to RM5.0b and RM4.0b (from RM4.5b and RM3.5b), respectively.

Valuations. Correspondingly, we increase our SoP-driven TP by 9% to RM2.77 (see Page 3) from RM2.54 on unchanged 18x FY26F PER valuation for its construction business, which is in-line with our valuation for big cap construction companies, i.e., GAMUDA (OP; TP: RM6.70) and SUNCON (MP; TP: RM3.16). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like IJM for: (i) it is poised to garner a slice of action in the imminent mega rail projects, i.e., MRT3 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 RM6.0b and new property sales of RM1.4b, and (iii) Kuantan Port’s position as the largest port in the East Coast capturing export and import activities growth. OUTPERFORM maintained

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 - 30 May 2024