• IJM Corp’s 1HFY17 results below estimates

• The results were driven by lower PBT margin

• Maintain earnings estimates despite tepid earnings

• Nonetheless, we maintain our BUY recommendation with a TP of RM4.00 per share

1HFY17 earnings came in below expectations. IJM’s 1HFY17 normalised PATAMI of RM279.4m (-43%YoY) met ours and consensus’ targets by 40.1% and 45.3% respectively. The deviation was mainly due to lower-than-expected earnings contribution from the infrastructure, and industrial segments whilst property earnings were still mired by weak demand.

Weak results influenced by PBT drop. IJM’s PBT dropped from RM647.4m in 1HFY16 to RM434m in 1HFY17 (-33%YoY); influenced by a compression of PBT margin from median of 17.6% in 1HFY16 to current period of 14.8% (-2.8ppts YoY). The weaker PBT is due to; (i) lower sales and anticipating the transfer of sales to the bottom line for new launches of property in FY2017. Notably, the weak demand of local property mart has prompted IJM Land to launch landed properties within the bracket of RM450k-RM650k in location such as Bandar Rimbayu and Seremban 2, (ii) insipid contribution lower margin spun piles and ready mix concrete from industrial segments and, (iii) drop of port cargo throughput in Kuantan Port by 70% for infrastructure segment.

Impact on earnings. Recognizably, against IJM’s negative milieu, it is only natural to trim our estimates. However, looking again at its quality orderbook of RM8.2bn (approximately 48 months or 1.6x revenue cover), we expect that the transfer of IJM’s revenue to its bottom line will likely happen in 2QFYE18-4QFYE18 and even-out its weak results. Hence, we will only trim our estimates if the FYE17 result delivers severe depletion of below 65% divergence from our earnings target.

Maintain BUY. We reaffirm our BUY recommendation with an unchanged SOP-based TP of RM4.00 per share with an undemanding implied PER of 11x which equates to the lower end of its peers’ in KL Construction Index.

Source: MIDF Research - 29 Nov 2016