INVESTMENT HIGHLIGHTS

• Working capital still in surplus

• EBITDA growth emanated from strong working capital

• EBITDA set to rebound

• Overall, we maintain our BUY recommendation with an unchanged TP of RM4.00

Working capital surplus… Since 2013, IJM’s has recorded an average working capital (WCap) of RM5.3bn, the WCap surplus is an anchor and a leading indicator to the company’s profitability. For example, in Q2FY14 to Q3FY14 WCap recorded an increase from RM3.4bn to RM4.8bn (+41.1%QoQ). This is followed by another bump-up in the WCap surplus in Q3FY14 to Q4FY14 from RM4.8bn to RM5.9bn (+22.9%QoQ). (Figure 1)

…evolved into EBITDA growth. The steady rise of WCap evolved into the EBITDA growth in 4Q14-2Q15. During the same period IJM’s share price advanced and its fundamentals improved developing a positive spread between ROIC* and WACC*. The spread indicates the importance of WCap in determining the direction of IJM ‘s profitability. The constructive surge in ROIC from Q2FY14 to Q2FY15 in an impact of earnings crystallization through surplus working capital of the corresponding period. (Figure 2).

EBITDA set to rebound. Furthermore, weighing that construction segment has contributed to c. 30.0% of revenue for the past 4 years, Wcap is an important ingredient to for IJM to clinch projects and maintaining its profitability and maintaining construction’s segmental revenue. Moving forward, WCap levels may seem to be stagnating for the past 3 quarters but we see this as an inherent strategy by the management to beef up the working capital by building quality receivables. IJM’s current outstanding orderbook is RM9.3bn which will set the stage for a rebound in its EBITDA level should the current working capital of RM6.9bn increases by +20.0% to RM8.28bn. The working capital growth signals the increase in EBITDA (Figure 3) thus we believe that the crystallization of IJM’s orderbook to its working capital potentially will be reflected in 2QFYE19’s earnings.

Prospect. We are positive that IJM will continue to replenish its orderbook by another RM1.0bn for FYE18. Evaluating its key position in Malaysia-China Kuantan Industrial Park (MCKIP) and the Kuantan Port we reckon that IJM would potentially bag civil works related to ECRL in Gambang vicinity in 4QFY18.

Recommendation. We reaffirm our BUY recommendation with an unchanged SOP-based TP of RM4.00 per share. We think that the current share price dip presents a good buying opportunity.

Source: MIDF Research - 5 Feb 2018