IJM’s 1HFY23 results met expectations with most business units showing recovery on improved prospects. Separately, IJM announced that it is buying out the 40% minority stake in Bandar Rimbayu from WCEHB for RM494m cash. Following the appointment of a new government, we believe the award of MRT3 work packages could be delayed and the new administration may put the toll road restructuring under review. We maintain our forecasts, TP of RM1.67 and MARKET PERFORM call.

Within expectations. 1HFY23 core net profit of RM148m (after adjusting for forex loss, impairment of assets and gain from investment disposals) came within expectations at 48% and 46% of our full-year forecast and the full-year consensus estimate, respectively.

1HFY23 revenue was marginally lower YoY in the absence of contributions from its plantation division which was sold last year. However, PBT almost quadrupled on improved profitability across the board as business units rebounded from a pandemic-stricken period a year ago. Its core net profit returned to the black from a loss a year ago.

To wholly own Bandar Rimbayu. Separately, IJM announced that it is buying out the 40% minority stake in Radiant Pillar Sdn Bhd from WCEHB for RM494m cash. Radiant Pillar is the developer for Bandar Rimbayu with a remaining GDV of RM8b. We are neutral over the acquisition price which we deem fair, implying a land-to-GDV ratio of 15%. Assuming a 70% margin of financing for the acquisition (at 4.5% rate), earning accretion towards the group would be minimal at c.RM3m/annum. Meanwhile, its net gearing would rise to 0.25x (from 0.2x).

IJM hosted an analyst briefing last Friday and the key takeaways are as follows:

1. IJM reiterated its RM3b construction replenishment target (YTD RM0.93b secured) backed by tenders from: (i) MRT3 for which they bided for all 3 available packages, (ii) ECRL, (iii) semiconductor factories and (iv) highways in India. Nonetheless, we stick to our RM1.9b target as we feel the MRT3 awards could be extended into FY24 upon a newly appointed government. Current outstanding order book stood at RM4.8b.

2. 1HFY23 property sales of RM0.7b (excluding RM1b land sales from London and Kuantan) are within our and company’s RM1.7b and RM2b target, respectively. The company will continue to focus on asset monetisation through non-core land sales and property sales within its local townships. IJM has earmarked launches worth RM0.76b in 2HFY23 while unbilled sales stood at RM3.1b.

3. Its industry division which is the biggest spun pile manufacturer in South East Asia is benefitting from the leaner cost structure post Covid and improved regional demand for construction of factories/warehouses which should sustain its double-digit PBT margins moving forward.

4. Kuantan Ports’ 1HFY23 throughput of 11m tonnes trailed our full year assumption of 25m hampered by the elevated freight charges, slow permit approval for bauxite exports, and weaker contributions from its largest client i.e. Alliance Steel which was weighed down by weaker steel demand from China.

5. The traffic volumes at its three local toll roads (NPE, Besraya and Lekas) have recovered post pandemic with LEKAS’s traffic even exceeding pre-pandemic levels. Meanwhile, in its negotiation with the previous government led by Dato’ Sri Ismail Sabri, IJM is more likely to get extension of concession periods vs. upfront cash compensation for reducing the toll rates at Besraya and Lekas from January 2023. While IJM guided for such restructuring being NPV-neutral, we believe the reality is that the P&L earnings will effectively be backloaded. Meanwhile, the negotiations for NPE and WCE toll rates are still ongoing.

We maintain our earnings forecasts and SoP-based TP of RM1.67 on unchanged 13x PER valuation for its construction business, at a discount to the 16-18x we ascribe to its peers to reflect IJM’s higher exposure in the office building segment which is weighed down by an oversupply situation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like IJM for: (i) being a proxy to the rollout of public infrastructure projects, (ii) its healthy balance sheet with gearing of 0.2x which enables them to gear up for PPP/PFI initiatives i.e. MRT3, and (iii) Kuantan Port’s position as the largest port in the east coast capturing export/import growth. However, we remain cautious over the restructuring of Besraya and their loss-making toll roads namely West Coast Expressway (WCE) and Lekas. Hence, maintain MARKET PERFORM.

Key downside risks for our call are: (i) sustained weak construction jobs flow, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rise in cost of building materials.

Source: Kenanga Research - 29 Nov 2022