Fair Value : RM4.73 | Recom : Underperform

The devil is in the lack of details. IJM seemed to suggest that Scomi Group’s biggest appeal to it lies in: (1) Its well established drilling fluid business; and (2) Its Bumi company status that allows it to apply for other Petronas licences. However, IJM was unable to specify which particular subsegments of the oil & gas sector it intends to go in together with Scomi Group, other than saying that “there are plenty of opportunities in the Rapid project”.

No numbers, milestones and management control. IJM Corp is unable to disclose specific forecasts for Scomi Group and it said that it has yet to decide on milestones to be achieved together with Scomi Group (for instance, when to set up JVs, when to secure Petronas licences and when to start bidding for Petronas jobs). The 25% stake in Scomi Group does not come with management control.

No other suitor for Scomi Group. We believe that IJM Corp could have squeezed an even better deal out of Scomi Group as it was its only suitor for the 25% stake “as far as IJM Corp is aware”.

Forecasts. Maintained, pending the completion of the deal.

Risks. The risks include: (1) New contracts secured in FY03/13-15 coming in above our target of RM1.5bn p.a.; and (2) Lower-than-expected input costs.

Maintain Underperform. We are not overly enthusiastic on construction stocks as we believe their share price performance is likely to be capped over the next 3-6 months as the market continues to demand a high risk premium for construction stocks ahead of the nation’s general election that will have to be held by Apr 2013. IJM Corp’s fair value is RM4.73 based on “sum of parts”, valuing its construction business at 11x 1-year forward earnings, in line with our 1-year forward target PER for the construction sector of 8-13x.

Source: RHB Research - 27 Sep 2012