• Maintain NEUTRAL and MYR1.59 TP, 0% upside with 3% FY23F (Mar) yield. The reduction in toll rates for the Sungai Besi Expressway (Besraya) and the Kajang-Seremban Expressway (Lekas) has been in effect from 1 Jan, following an agreement between IJM Corp and the Public Works Ministry, which was then decided by the Cabinet on 21 Dec 2022. We believe that the Mass Rapid Transit 3 project remains the sole major catalyst at the moment, barring any unforeseen huge cost cuts by the Government on the project – which justifies our NEUTRAL call.

• Details on toll restructuring. Toll rates will be reduced by as much as MYR0.15 (7.5% reduction) for Class 1 vehicles passing through the Loke Yew and The Mines toll plazas (North and South) on the Besraya. On a blended basis, Besraya’s latest toll rate across all vehicle classes now stands at MYR2.54 (vs MYR2.73 previously), ie a 7% decrease. On the other hand, the toll rate for Class 1 vehicles for the Lekas Expressway has been reduced to 0.1666 sen/km from 0.1811sen/km for the closed toll system. For the open toll system at the Ampangan Toll Plaza, the toll rate remains as it is. We also gathered that concession periods for Besraya and Lekas have been extended for another six and 25 years. As such, Besraya’s concession will end in 2046 (previously 2040) while that for Lekas will expire in 2064 (previously 2039). The reduction in the toll rates would enable the Government to save compensation payments worth c.MYR2bn.

• Impact on IJM. Besraya contributed 15% and 25% in terms of revenue and PBT towards IJM’s infrastructure segment in FY22. Meanwhile, Besraya accounted for 2.4% and 3.7% of IJM’s total revenue and PBT in FY22. Taking into account the latest toll rate reduction, Besraya’s PAT for FY23- 25F is reduced by 13%, 12% and 11%. Valuation-wise, the DCF value for Besraya in our SOP calculation increases to MYR795m from MYR781m, following the concession extension. This follows the higher traffic growth assumption of 3.5% (from 3%) for FY23-FY30, and 2.5% (from 2.0%) from FY31F until concession expires. As for Lekas, IJM has written off its investments in Lekas in prior years – so the restructuring should not affect our valuation and earnings estimates for IJM. The next restructuring phase involve the New Pantai Expressway and West Coast Expressway (likely within 1HCY23).

• We trim FY23-25F earnings by 1%, 2% and 3% after imputing the said changes for Besraya’s concession. Post earnings revision, our SOP- derived TP remains at MYR1.59 as the change in DCF value of Besraya is not significant to the overall SOP value – after ascribing a 0% ESG premium, based on our in-house ESG methodology. Long-term catalysts include extension works for its highways, particularly Besraya whereby IJM previously clinched a MYR600m contract in 2015 for extending Besraya.

• Key downside risks include failure to secure new contracts and a slowdown in the property market. The opposite would present upside risks.

Source: RHB Research - 3 Jan 2023