What’s New

• Feeling more positive post meeting with CEO

• Given its diversified nature and record orderbook, incremental new wins unlikely to rerate the stock

• Better earnings delivery needed but difficult to achieve in near to medium term

• HOLD, TP RM3.30

Better earnings delivery needed. We acknowledge IJM’s strong management and execution track record. Its strong balance sheet enables it to fund and participate in larger-scale projects without having to raise equity. Nonetheless given its diversified nature and record orderbook, additional incremental wins may not be an added catalyst for the stock. We think better earnings delivery would be a more important catalyst for the stock. But this may be difficult to achieve in the near to medium term given a still soft property market, lower throughput for Kuantan Port given the moratorium on bauxite and drag from additional amortisation charges for its newer concessions.

Peak orderbook but will continue to grow marginally. Its peak quality orderbook of RM8.7bn incorporates the recent Bukit Bintang City Centre (BBCC) development project win 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. Going forward, we expect incremental project wins to be sizeable at a minimum of RM500m per contract and are likely 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 FY18F EPS by <2%.

No visible recovery for property. The focus for property will be on selling existing inventory by offering rebates while future launches will be targeting the more affordable segment. This may be a dampener on margins in the near term. We expect IJM to end FY17F with property sales of RM1.4bn, flat y-o-y. It still has unbilled sales of RM1.76bn, which implies decent visibility over the next 1-2 years.

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:

Better earnings delivery. We think upside risk for the stock is better earnings delivery. But this will be difficult to achieve given still weak property sales and higher amortisation for its concessions.

Source: Alliance Research - 15 Mar 2017