Results Review

• IJM’s 1HFY20 net profit of RM129.5mn came in within our expectations but below consensus’ estimate, accounting for 37.6% and 32.0% of ours and street’s full-year estimate. We deem the results to be within our expectation as we anticipate a stronger 2HFY20, boosted by lumpy recognition from Royal Mint property development project in UK and better plantation earnings on the back of higher CPO price.

• A second interim dividend of 2sen/share was declared, matching the amount declared in the corresponding period last year.

• YoY, 1HFY20 core profit was 6.0% higher at RM129.5mn, as revenue increased by 13.2% to RM3,117.8mn. Property, Plantation recorded significant earnings improvement but was largely offset by associates, which sank into a loss of RM46.6mn from a profit of RM31.4mn a year ago. Performance of construction and industry divisions was relatively flat in terms of revenue and PBT.

• QoQ, 2QFY20 net profit jumped 18.0% to RM70.1mn, mainly driven by lower taxation as its tax rate decreased by 17.6%-pts to 26.3%. At the PBT level, 2QFY20 profit was 20.4% lower, dragged mainly by associates which turned loss-making, but partially offset by better performance of JVs

Briefing Highlights

• Its outstanding construction order book depleted further from RM6.1bn a quarter ago to RM5.1bn as of end-2QFY20, translating into 2.6x FY19 construction revenue. Of the RM5.1bn outstanding order book, 53% is derived from road projects, 34% from building jobs while the remaining 13% comes from infrastructure projects.

• The management previously set a construction order book replenishment target of RM2bn for FY20. However, with a delay expected after the resubmission of development plan for some components of The Light City, in which IJM previously targeted to secure about RM1.6bn of job in FY20, it may be a tall order for IJM to hit the RM2bn order book replenishment in FY20. Therefore, there is a downside risk to our FY20 order book replenishment assumption of RM1.5bn as it has yet to secure any new construction project in FY20.

• IJM registered property sales of RM820mn in 1HFY20, on track to match the RM1.6bn achieved for FY19. Its property unbilled sales stood at RM1.9bn.

• Sections 4, 5, 8, 9 and 10 of West Coast Expressway have been completed with sections 8, 9 and 10 opened to traffic. We expect tolling for sections 8, 9 and 10 to start either in December 2019 or January 2020

Impact

• We trim FY20 earnings forecast by 2.3% but raise FY21 and FY22 earnings forecasts by 5.5% and 8.8% respectively after synchronising IJMPLNT’s earnings forecasts.

Outlook

• Backed by a healthy outstanding order book of RM5.1bn, we expect the construction division to be a main earnings contributor in the foreseeable future.

• For the longer term, we see IJM’s Kuantan Port benefiting from continuous FDIs which set up manufacturing facilities in Malaysia-China Kuantan Industrial Park (MCKIP). The construction of Maxtrek Tyres manufacturing plant is undergoing on 365 acres of land in MCKIP while NewOcean Energy (M), a new investor involves in crude oil refinery, will set up facilities on 76 acres of land in MCKIP.

• We expect higher CPO prices for CY20 and CY21, underpinned by lower palm oil supply, firmer soybean oil prices and higher biodiesel mandates, which are expected to reduce palm oil stockpiles.

Valuation

• Following the earnings revision, we raised IJM’s target price from RM2.18 to RM2.20, based on unchanged 0.8x CY20 price to book ratio. Upgrade the stock to HOLD after the recent weakness in share price.

Source: TA Research - 27 Nov 2019