• Maintain NEUTRAL, new MYR1.81 TP from MYR1.66, 1% upside with 3% FY23F (Mar) yield. IJM’s FY22 core earnings of MYR162.2m (-39.3% YoY) are lower than expected, at only 77% and 73% of our and Street estimates. The reason for the negative deviation was partly due to higher- than-expected opex and administrative expenses. Our NEUTRAL call is premised on the fact that IJM may need a longer time to address the earnings gap from the plantation disposal, as its plans so far include the Globalcomm acquisition, which may bring in a PBT of <MYR10m pa.

• Revenue dragged by property and construction. IJM booked MYR1.2bn (-9% YoY) in revenue for 4QFY22. PBT for the property unit in 4QFY22 plunged 75.6% YoY despite recording record property sales amounting to MYR2.5bn, partly on the impairment of inventories pertaining to the industrial development in Malaysia-China Kuantan Industrial Park (MCKIP). Meanwhile, the infrastructure division recorded a pre-tax loss of MYR27.6m (4Q21 PBT: MYR15m) partly from higher maintenance costs.

• On the flip side, the construction segment recorded a 62.7% YoY growth in 4QFY22 due to higher profit contributions following the finalisation of accounts of certain JV projects. The group’s outstanding construction orderbook stood at MYR4.3bn (around three years’ visibility) as at end-4QFY22 after announcing major contract wins worth MYR1.7bn. Moving forward, IJM targets to replenish c.MYR3bn worth of new jobs in FY23 which could come from Mass Rapid Transit 3 (MRT3) elevated works.

• Disposal of toll highway business not on the cards. Management clarified that it plans to remain in the toll highway business, since it is awaiting a restructuring of the toll concession by the Government. With that in mind, IJM is finalising the acquisition of a 60% stake in Globalcomm for a consideration of up to MYR35m. Globalcomm is primarily involved in the providing telecommunication infrastructure solutions. Such an acquisition is expected to synergise its toll highway business, by leasing ducting and fibre to telcos through a highway network grid, amongst others.

• We lift FY23-24F earnings by 13% and 10% as we impute a higher job replenishment target: MYR3bn for FY23 (from MYR2bn) and MYR2.5bn for FY24 (from MYR2bn), amidst the rollout of MRT3 work packages and the gradual pick-up in residential and industrial property demand. This, in turn, should mitigate the effect of a more conservative margin assumption amid higher opex and administrative costs. We also introduce FY25F earnings estimates, with projected job wins totalling MYR2bn. We also roll forward our valuation base year to FY24F for all segments. As such, our TP rises to MYR1.81, after ascribing a 0% ESG premium based on our in-house ESG methodology. Key downside risks include a failure to secure new contracts and a prolonged period of elevated high material costs. The opposite of these circumstances would present upside risks.

Source: RHB Research - 30 May 2022