Gearing up for the next construction upcycle (previously RM1.50)

KEY INVESTMENT HIGHLIGHTS

• Infrastructure assets such as port and tolls operation have sharply rebounded to about pre-MCO period

• Prompt resumption of construction and property business activities are expected to record stronger quarterly earnings

• Well-positioned to take part in the impending revival of mega infra projects to boost its job replenishment rate

• Healthy current outstanding order book of RM5.5b which translates into earnings visibility for the next three years

• Elevated CPO price to uplift plantation business segment

• Maintain BUY with a revised target price at RM1.60

Foresee steep earnings rebound from infrastructure assets. The group saw a sharp recovery in its Kuantan port operations through resilient throughput volumes post-MCO period, possibly driven by a backlog during prior months of inactivity and continuous demand for freight transportation. Moving forward, we posit that the continuation of the East Coast Rail Link (ECRL) which will connect Kuantan Port and Port Klang in Selangor, as well as the strong interests of foreign direct investments to set up plants and factories at the nearby Malaysia-China Kuantan Industrial Park (MCKIP) could further boost the cargo throughput growth.

Recovery in tolled highways. The domestic traffic volume has recovered to about pre-MCO period (c.85%) which should lend support to steady earnings from the tolls segment. While the resurgence of Covid-19 cases might be a concern, we opine that the Klang Valley centric tolled-traffic flows would not be impacted much as the bulk of the cases are concentrated in Kedah and Sabah. Should there be a fresh outbreak in the Klang Valley, we postulate that a total lockdown is mostly unlikely in view of the vast economic consequences as well as assurances from the Malaysian government. This would at least help to maintain current level of road transport usage, in our view. On overseas side, the outlook on its Indian toll highways to be less encouraging given the country’s rampant coronavirus infections at current juncture.

Green shoots in property segment. We are now inputting a higher property sales target of RM1.0b-1.2b which is slightly below the FY20 figures and higher than the management’s guidance of RM800m to RM1b target. This is mainly premised on the (1) group’s decent sales of RM320.0m from the central and international region as at 1QFY21, (2) Phenomenal response for the Phase 1 and Phase 2 of Starling, Rimbayu which have been sold out upon launching in June-20 and August-20 respectively (3) Launching of Starling Phase 3 by mid October-20, (4) Potential upcoming further launches of The Terraces in Penang and Riana Dutamas. Moving forward, we expect the property segment of the group to gradually recover on better sales, benefitting from the Home Ownership Campaign as announced by the Malaysian Government as well as low interest rate environment to spur mortgage demand.

Construction segment to be a focal point in coming growth cycle. We gather that work sites operations have largely resumed to about 80% of pre-MCO which should lead to higher progress billings and hence better earnings recovery in the upcoming quarters. This is primarily driven by the prompt resumption of business operations and implementation of catch-up strategies to ramp up progress from 2QFY21 onwards. Given the group’s strong execution track record and healthy balance sheet, we are of the view that the group will be in good stead as a strong contender in the bidding of the impending revival of mega infra jobs (i.e. MRT3 and KL-SG HSR) in order to grow its job replenishment rate in FY21 and FY22. In addition, we understand that the remaining jobs of about RM530m of the Light City Project might be awarded to the group in coming quarters which is within our replenishment assumption. Note that the current order book of RM5.5b will provide the group with an earnings visibility for about the next three years.

Earnings estimates. We are revising our FY21/22/23 forecast to RM212.6m/RM363.5m/RM417.2m respectively to better reflect stronger earnings performance in coming quarters as we are inputting higher property sales and construction progress billings, as well as possibly better financial performance from its plantation segment on elevated CPO price.

Target Price. Following the earnings forecasts adjustment, we are revising our target price to RM1.60 (previously RM1.50). This is achieved through pegging the group’s FY22 EPS to an unchanged 5-year historical average PE of 16.0x.

Maintain BUY. We remain optimistic on the group’ outlook in the coming quarters as it is expected to experience an earnings upcycle through the sharp recovery of its port and tolls operations to almost pre-MCO period. On the construction side, we believe that there would be potential ramp-up of work pace to make up for the time loss and this could speed up the progress billings. This is also mainly driven by the group’s sizable outstanding order book of RM5.5b with an earnings visibility over the next three years. We are also comforted with the fact that group’s order book remains intact with no major project cancellation in sight despite the advent of Covid-19. We postulate that the group is also geared up to clinch possible further contract awards from the remaining The Light City project and the impending mega infrastructure projects ahead of Budget 2021 on 6 November-20 moving forward given its strong execution track record and healthy balance sheet. Meanwhile, a higher property sales is also likely to sustain with the reintroduction of Home Ownership Campaigns until 31 May 2021. On the plantation side, we are also expecting better financial performance from this segment given the current elevated CPO price to partially support earnings momentum. Thus, we posit that the group to post better results across its business segments following the resumption of economic activities. All factors considered, we maintain our BUY recommendation on IJMC.

Source: MIDF Research - 8 Oct 2020