What’s New

• 2Q17 results were in-line, better showing for construction and plantations
• Project flows to remain strong
• Kuantan Port to benefit from ECRL
• Maintain HOLD, TP of RM3.30

Eroding defensive proxy

Diminishing defensive proxy to the sector. IJM’s appeal as a construction proxy has always been its strong execution track record. This, coupled with its now record orderbook, makes it a defensive proxy to the sector. Nonetheless, this defensive positioning may be somewhat eroded over the near term as it now owns 24.4% of the Scomi Group post the conversion of the bonds. Its more cyclical property and plantation businesses add additional volatility to its earnings.

Peak orderbook but will continue to grow marginally. Its peak quality orderbook of RM8.2bn incorporates the MRT Line 2, V203 package and can provide solid earnings visibility over the next 2-3 years; but this may also limit the group’s ability to take on other large-scale projects. Given that it can be selective now with its peak orderbook, we expect incremental wins from here to be margin-enhancing. The company’s diversified and defensive nature also makes it a less attractive bet to potentially capitalise on more contract flows with the rollout of the 11MP. We estimate every RM1bn increase in new contract wins (vs our base case) would only raise FY17F EPS by <2%

Headwinds ahead for property. IJM Land’s FY16 pretax profit fell 68% to RM159m. It still has unbilled sales of RM1.7bn, which implies decent visibility over the next 1-2 years. FY16 property sales came in at RM1.45bn (vs RM1.7bn in FY15). It appears on track to hit its FY17F sales target of RM1.4bn but this may be at the expense of margins with a different product mix and higher marketing costs.

Valuation

Our valuation for IJM is based on sum-of-the-parts valuation given its diversified business portfolio. We value the construction business based on a combination of DCF and PE valuation methodologies, while its property and concession businesses are valued based on DCF.

Key Risks to Our View

Stronger-than-expected wins. We believe IJM will be more selective when bidding for projects, given its peak orderbook. But IJM remains a reputable contractor with a strong execution track record and balance sheet, and may still be present in other projects.

Source: Alliance Research - 29 Nov 2016