IJM has started replenishing its construction order book in FY25 (Mar) with RM962.3m contracts to build a warehouse in Shah Alam, Selangor, and a semiconductor foundry in Penang. We maintain our forecasts but raise our TP by 8%. Downgrade our call to MARKET PERFORM from OUTPERFORM following the recent run-up in its share price.

IJM has secured RM962.3m contracts comprising:

1. a RM584.3m contract from Strategic Sonata Sdn Bhd for the construction of a 6-storey warehouse and ancillary facilities in Section 15, Shah Alam, Selangor, to be completed within 28 months from Jun 2024; and

2. a RM378m building contract for Phase 1 of a semiconductor manufacturing facility for Siliconware Precision Malaysia Sdn Bhd (part of ASE Technology Holding Co Ltd, the world’s largest outsourced semiconductor assembly and test company) in Bandar Cassia Technology Park, Penang, to be completed by Oct 2025.

These are IJM’s first job wins in FY25 (vs. our full-year assumption of RM5b), boosting its outstanding construction order book to RM7b.

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project and several 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: Maintained. Our forecasts assume job wins of RM5b and RM4b in FY25-26, respectively.

Valuations. Nonetheless, we lift our SoP-driven TP by 8% to RM3.00 (see Page 2) from RM2.77 to reflect an additional 2x multiple increase in our PER valuation for all construction stocks to factor in the improved prospects for the roll-out of public infrastructure projects as the government gets cracking on fiscal policy reforms with the removal of diesel fuel subsidy rationalisation on 10 Jun 2024. We now value IJM’s construction business at 20x earnings (from 18x). 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 RM7.0b 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. However, its valuations have become rich after the recent run-up in its share price. Downgrade to MARKET PERFORM from 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 - 24 Jun 2024