• Downgrade to NEUTRAL from Buy, new MYR2.04 TP from MYR2.66, 10% upside with 3.2% yield. This is on our sector downgrade to NEUTRAL, as we observe that risks of delays would dominate sentiment on the stock. Accordingly, this will create overhang, leading us to adjust our big cap P/E ratio from 14x to 12x, -0.5SD from its 5-year mean.

• Recap on 3QFY20. IJM’s 3QFY20 core net profit decreased 33% YoY to MYR49.1m, with lower PBT at the construction, property, manufacturing, and infrastructure divisions offsetting growth in the plantation business. For 9MFY20, core earnings fell 35% YoY to MYR198m, and were below our and consensus forecasts at 46-49% of FY20 estimates. As of 31 Dec 2019, IJM’s outstanding orderbook stood at MYR4.5bn, which should last for another two years.

• The recent shift in political landscape has left a long shadow over the sector. Visibility has dimmed, with no clear direction on where the new Government’s priorities lie. The new political leadership may want to reassess the country’s infrastructure strategy, which could delay project implementation. While we are unable to rule out the proposed large-scale infrastructure projects like Mass Rapid Transit 3 (MRT3) and high speed rail (HSR), the timeframe remains uncertain.

• Accordingly, we have now turned cautious compared to our previous more bullish assessment on the outlook for the sector. The unexpected change in the political environment should translate to heightened downside risks in the near term, capping upside potential.

• In deriving our new TP, we adjusted down our earnings for FY20-22F by 5%, 8%, and 11% respectively. We changed our yearly growth assumption to -1% for construction and +2% for other segments, as we adopt a conservative stance. The construction segment is ascribed to P/E of 12x – in line with adjustments made for other big caps due to sector uncertainties. In order to adequately reflect prospects over the next year, we have rolled over our base year to FY21 from FY20.

• Key risks to our call include a prolonged slowdown in the property market, longer-than-expected delays in the resumption of public sector projects, inability to secure new orders, and disposal of its toll concessions at unfavourable valuations. A reverse to these factors represent upside risks.

Source: RHB Research - 3 Mar 2020