KEY INVESTMENT HIGHLIGHTS

• 2QFY21 normalised earnings came in at RM99.5m on better cost management and lower finance cost
• 1HFY21 normalised earnings declined slight by -9.7%yoy to RM112.8m which is in line with our expectation
• Construction sites are unaffected during CMCO and healthy progress would potentially lead to higher progress billings
• Solid order book of RM5.1b which translates into earnings visibility for the next four years
• Maintain BUY with a revised target price at RM1.80

Resilient 2QFY21. IJM Corporation Berhad (IJMC)’s 2QFY21 normalised earnings improved by +27.9%yoy to RM99.5m, primarily due to lower cost of sales of RM1.1b (-13.4%yoy) and lower finance cost of RM45.4m (-24.3%yoy) as well as higher progress billing due to prompt resumption of construction and business activities post-CMCO. Cumulatively, the group’s 6MFY21 normalised earnings dropped by -9.7%yoy to RM112.8m which came in within ours and consensus expectations, accounting for 53.1% and 49.2% of the full year estimates respectively. Moving forward, we expect IJMC’s construction and business activities to continue to regain pace as work site operations are unaffected by current CMCO.

Solid order book to support earnings momentum. Albeit the group’s construction division posted a decline in revenue to RM927.0m (- 25.6%yoy) on lower progress billings, 1QFY21 profit before tax margin improved by +1.0pps yoy to 7.3% on better cost management. In addition, we are of the view that the current strong order book of the group which stood at RM5.1b as at 30 September 2020 is expected to provide earnings momentum for the group moving forward. This is mainly due to the prompt resumption of business operations and implementation of catch-up strategies to ramp up progress from 3QFY21 onwards.

Property development segment to recover. IJMC’s property development revenue fell -52.1%yoy to RM433.1m in 6MFY21 as a result of lower sales during MCO as compared to the corresponding period. However, we opine that the group has achieved a decent sales of RM720.0m (slightly above 50% of FY20 sales), mainly from the central and international region with an unbilled sales of about RM1.2b as at 30 September 2020. Moving forward, we expect the property segment of the group to gradually recover on better sales ahead during the Home Ownership Campaign as announced by the Malaysian Government and recovery in demand for its properties in abroad.

Plantation sector to be a bright spot. The segment recorded a +36.4%yoy topline growth to RM417.4m in 6MFY21. This led to the segment to turnaround at the PBT level of RM112.9m as compared to -RM10.3m in the corresponding period, largely due to higher commodity prices and higher sales volume. We anticipate the recovery of crop production in both the Malaysian and Indonesian operations and larger areas attaining maturity in the Indonesian operations to continue to bode well for the group’s plantation division.

Earnings estimates. We are revising our earnings forecast slightly higher for FY21/22/23 to RM218.4m, RM369.8m and RM424.1m as we raise our earnings contribution assumption from the plantation division on higher CPO price.

Target Price. We are revising our target price to RM1.80 (previously RM1.60). This is based on pegging the group’s FY22 EPS to a higher PE of 17.7x (previously 16.0x) which is about one standard deviation above the group’s 5-year historical average. The higher PE is premised on the favourable sentiments on the group as a prime beneficiary of continuation of mega public infra projects as announced in Budget 2021 and favourable business mix.

Maintain BUY. We remain encouraged with the group’s revenue and earnings moving forward. This is mainly premised on the group’s sizeable outstanding order book of RM5.1b with an earnings visibility over the next four years and an expected stronger financial performance from its plantation division on elevated CPO price and healthy FFB production growth. We are expecting sequential recovery in earnings following the resumption of construction and business activities and increased workforce capacity at work sites as construction sites were unaffected by CMCO. Moreover, there is a potential ramp-up of work pace to make up for the time loss and this could speed up the progress billings. Meanwhile, a higher property sales is also likely with the reintroduction of Home Ownership Campaigns until 31 December 2020. We also opine that the group remains a key and strong contender for the continuation of mega public infra projects such as MRT, KL-SG HSR, KVDT2 and ECRL as announced in Budget 2021 which would bode well with its orderbook replenishment moving forward. All factors considered, we maintain our BUY recommendation on IJMC.

Source: MIDF Research - 26 Nov 2020