INVESTMENT HIGHLIGHTS

• 6MFY19 earnings were below expectations at 24.3% and 17.4% of our and consensus yearly estimates respectively

• The deviation from estimates stemmed from lower than expected margin conversion, against revenue

• This was coupled with discouraging performance in the plantation segment, having to incur expanded cost structure

• Despite a slowdown in the construction work progress, the revenue recognized was within expectations

• Revised down earnings forecasts by -54.0% and -19.8% for FY19 and FY20 respectively

• Given the earnings adjustments, we downgrade our call to NEUTRAL with lower TP of RM1.92

Below expectations. The group’s 6MFY19 revenue contracted by - 10.0% to RM2.8b, from the corresponding period last year. The negative growth was a result of slowdowns in key segments namely construction, industry and plantation. For 6MFY19, these segments recorded decline of -11.7%, -21.3%yoy and -14.9%yoy in revenue respectively. As a result, PATAMI dropped -64.0%yoy to RM84.7m in 6MFY19 which was below ours and consensus’ expectations at 24.3% and 17.4% of respective yearly estimates.

What went wrong? We surmised the deviation from our estimates stemmed from the lower than expected margin conversion. Notably, the group’s profitability was hit badly due to slower demand in aforementioned segments (i.e. industry and plantation). We should highlight that the industry segment (which comprised piles and quarrying sectors) recorded the biggest drop in revenue (-21.3%yoy), subsequent to lower sales volumes.

This was coupled with dismal performance in the plantation segment, impacted by lower CPO sales and prices. It is notable that average CPO price in 6MFY19 recorded a -14.4% decline at RM2,326/t. The setback in this segment was more pronounced in its Indonesian operations, due to higher production costs stemming from the increase in young mature areas.

Construction progress was slower, but within expectations. On average, the construction segment represents the largest chunk of income, accounting about 38% of total revenue. In 6MFY19, revenue recognition was slower (- 11.7%yoy) as a result of slowdown in overall construction progress with new projects remained at infancy stages. A notable project win in CY18 was the LRT3 contract worth RM1.1b, which was awarded in March. We noted that the project has run into a delay, subsequent to government’s decision to revise the project costs. In the near term, we believe that construction works would pick up pace, following the green light granted by government to continue the project.

Impact on earnings. While the group’s revenue recognized was within our expectation, we think it is apt for us to revise our margin assumptions at this juncture. This was subsequent to several factors which have weighed down earnings such as high cost structure and lower sales volumes. Consequently, we revised down our profit estimates by -54.0% and -19.8% for FY19 and FY20 respectively.

Recommendation. We downgrade our call to NEUTRAL on the stock with an adjusted TP of RM1.92. The TP was derived from our multiples valuation, pegging the FY20 BVPS to 0.7x PBV. Despite the downgrade, we believe IJM’s portfolio remain attractive for investors who prefer diversified exposure. Hence, we see any potential retracement in share price following the 2QFY19 results shall present buying opportunities for investors. Moving forward, its biggest earnings contributor, namely construction, is expected to stay resilient, leveraging on its long experience and competitive skills set to win quality projects. Its current outstanding order book is estimated at RM8.8b, providing 3.8x income visibility to its 2-year average. In the near term, management is optimistic in clinching more construction packages predicated on potential roll out of hospital and road developments.

Source: MIDF Research - 27 Nov 2018