• Maintain NEUTRAL and MYR1.81 TP, 4% upside with c.3% FY23F (Mar) yield. IJM’s 1QFY23 core earnings of MYR72.5m (+>50% YoY) met expectations – at 25% and 22% of our and Street full-year projections. Our NEUTRAL stance is premised on the fact that it may require a longer time to address the earnings gap from the plantation disposal, as its plans so far include the Globalcomm acquisition, which is expected to bring in an annual PBT of <MYR10m.

• Revenue dragged by property and construction. IJM generated MYR1.1bn (+4% YoY) in revenue during 1QFY23. PBT for the construction arm plunged 35% YoY from lower construction activities, as a result of certain projects being completed in the previous financial year. On the bright side, the property segment recorded a 4% YoY PBT growth in 1QFY23 due to higher work progress at its ongoing projects. Meanwhile, the manufacturing and quarrying business saw its PBT jump by more than 50% YoY, on higher deliveries of piles and ready-mixed concrete, coupled with improved margins from the piles business.

• Outlook. The group’s outstanding construction orderbook stood at MYR3.9bn (around three years’ visibility) as at end-1QFY23, with no announcement of major contract wins during the quarter. 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. On the other hand, the property development project, will be supported by its unbilled sales of c. MYR2.2bn as at end 1QFY23.

• Prospects of the toll concession business. The group is awaiting the Government’s decision on restructuring its highway concessions which may include Sungai Besi Expressway, New Pantai Expressway and Lebuhraya Kajang Seremban under the first phase, in our view, as the West Coast Expressway is still under construction. As such, IJM could likely remain in handling the highway concessions following the restructuring. Furthermore, the group’s intention to remain in the highway business augurs well, with the acquisition of a 60% stake in Globalcomm (a telecommunication infrastructure services provider) which was finalised in August. 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.

• Earnings and valuation. We make no changes to our estimates as IJM’s results are in line with expectations. As such, our SOP-derived TP of MYR1.81 is maintained after ascribing a 0% ESG premium, based on our in-house ESG methodology. We believe that positives regarding the MRT3 projects wins have been likely priced in at this juncture, without other catalysts in sign – which rationalises our NEUTRAL stock rating.

• Key downside risks include 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 - 25 Aug 2022