• Keep BUY and MYR4.39 TP (46% upside), c.3% FY25F (Mar) yield. IJM Corp has proposed to acquire a 50% stake in JRL Group (JRL) for GBP50m (c.MYR283m). The transaction entails the subscription of new ordinary shares in JRL. Proceeds from IJM’s investment will be used to enhance JRL’s balance sheet and liquidity for working capital. We expect the deal to put IJM in a sweet spot to leverage on the UK construction market, which has seen 9MCY24 new orders grow 6.5% YoY, according to the Office of National Statistics.

• Background of JRL. JRL was founded in 1996. It provides fully integrated building solutions in the UK, and is represented by various brands specialising in turnkey contracts, mechanical and electrical, façade solutions, and the hire and sale of tower cranes, among others (Figure 1). Major jobs on hand include the Brindley Drive 46-storey tower planned by developer Court Collaboration in the heart of Birmingham.

• Value of the deal. After two straight years of losses, JRL recorded a PBT of GBP9m from a revenue base of GBP311m for the first six months of FY24. Assuming a 25% tax rate, JRL would record GBP13.5m PAT on an annualised basis for FY24. Taking into consideration the 50% stake for a price tag of GBP50m, and a GBP6.8m annualised estimated PAT for FY24, the deal would be transacted at a c.7.4x P/E which is not lofty in our view, compared to listed peers of JRL in the UK which are trading at an average forward P/E of 10x.

• Potential impact for IJM. Based on its balance sheet as of end 1QFY25, IJM’s net gearing is expected to increase to 0.31x from 0.29x, assuming the deal is funded fully using cash. This net gearing level is manageable, in our view. IJM’s latest orderbook of c.MYR6.4bn can also be boosted by JRL’s orderbook of GBP1.5bn (c.MYR8.5bn). JRL itself is forecasting a c.GBP20m profit on the back of GBP760m revenue for the full year of 2024. If this were to materialise, IJM may book an additional GBP10bn (c.MYR56m), which translates to another 11% to its current projected earnings.

• Execution risk. We think the execution risk is manageable post acquisition, as JRL was the main contractor for IJM Land’s maiden UK property project, the Royal Mint Gardens Phase 1 and is currently the main contractor for Phase 2 of the same project.

• No changes to our earnings estimates pending completion of the deal. As such, our SOP-derived TP of MYR4.39 is unchanged. Our TP includes a 2% ESG premium based on its ESG score of 3.1 (above the country median).

• Rerating catalysts include more wins from the industrial and data centre space and also jobs in Sarawak and Indonesia.

• Key risks include the failure to secure contracts in a timely manner.

Source: RHB Securities Research - 26 Nov 2024