KEY INVESTMENT HIGHLIGHTS

• Earnings below expectations

• Plantation sector a key contributor to IJM’s revenue

• Infrastructure division revenue was up +9.1%yoy

• Construction segment remains flattish

• Property development income disappoints

• Maintain NEUTRAL with TP of RM1.95

Earnings below expectations. IJM Corp Berhad reported a slight 0.7%yoy rise in total PATAMI to RM179.3m in 9QFY20 from RM178.1m in previous corresponding period. The figure missed expectations at 48.4% and 41.5% of our and consensus full year estimates respectively.

In the quarter, all divisions except property development and manufacturing & quarrying saw positive growth. Segments which recorded growth in earnings were plantation (+66.5%yoy), infrastructure (+9.1%yoy) and construction (+0.6%yoy).

Plantation sector being the key contributor to IJM’s revenue, recorded a +66.5%yoy topline growth in 3QFY20. Its bottom line was buoyed by improved PBT margins which expanded by +15.4ppts. The better performance was underpinned by higher CPO sales volume and prices. Moreover, FFB production increased +11.6%yoy due to (1) crop recovery from the FY15/FY16 El Nino, and (2) peak cropping cycle.

Infrastructure division revenue was up +9.1%yoy to RM202.7m in 3QFY20 backed by an expansion of cargo throughput handled by the Group’s port concession which grew by +14%yoy. Moreover, infrastructure division’s pre-tax profit climbed +10.7%yoy in 9MFY20 mainly due to higher contributions from (1) IJM’s wholly owned local tolls & port concessions, and (2) lower net unrealised foreign exchange loss of RM6.0 million on the US Dollar denominated borrowings as compared to unrealised foreign exchange loss of RM36.1 million in FY19.

Construction segment remains flattish. In 3QFY20, the revenue registered under this segment increased by merely +0.6%yoy to RM482.2m while its pre-tax profit period decreased by -16.9%yoy which was attributable to the decline in overall construction margin and increased finance cost. IJM’s current order book stood at RM4.5b. The construction division expects a challenging year ahead due to (1) subdued property market, (2) reduced infrastructure spending by the Government, (3) reduced availability of new construction jobs in the local market, as well as (4) more competitive tender environment.

Property development income disappoints. In 3QFY20, revenue dropped by -32.3%yoy to RM325.1m from RM479.9m in the previous year. This topline contraction was attributable to (1) completion of certain development projects, and (2) sale of commercial land that took place in FY19, and (3) new launches for the current quarter are being realigned due to product adjustments. Moving forward, with the potential conversion of unbilled sales of about RM1.9m, the property segment is anticipated to be a better contributor to IJM’s earnings underpinned by the strategic locations of its properties and the brand premium that it has established.

Maintain NEUTRAL. We slashed earnings by -30.4% for FY20 and but kept FY21 numbers unchanged after factoring weaker performance from property development segment. We maintain our TP of RM1.95 (pegging the FY21 BVPS to 0.7x PBV). On that account, we maintain our NEUTRAL call.

Source: MIDF Research - 26 Feb 2020