IJM's 1HFY25 results met expectation with core profit rising 14% YoY to RM234.3m, driven by robust construction activity. Local construction job prospects remain promising, while the proposed acquisition of JRL offers IJM immediate entry into the developed UK construction market, complementing its existing property projects there. We maintain our forecasts and TP of RM3.16 but upgrade the stock to OUTPERFORM as the recent price weakness presents a buying opportunity.

1HFY25 results in line. At 50%/46% of house/street's full-year estimates. IJM's 1HYF25 core profit of RM234.3m came within expectations. It declared first interim NDPS of 2.0 sen (ex-date: 13 Dec; payment date: 27 Dec) consistent with 2QFY24.

Construction and property-driven QoQ earnings. 2QFY25 core profit jumped 37% QoQ to RM135.5m, supported by an 8% revenue increase. This was driven by strong growth in the construction (+15%) and property development (+18%) segments, partially offset by lower port infrastructure earnings (cargo throughput fell to 6.6m tons from 7.1m tons) and increased toll operation's losses in Argentina.

Higher construction activities led growth in 1HFY25. 1HFY25 core profit leapt 14% to RM234.3m on the back of 9% hike in revenue due to 61% surge in construction revenue. Meanwhile, property PBT (ex- unrealised forex loss) rose 7% on the back of 8% hike in revenue (ex- land sales last year). Similarly, higher port revenue (+7%) due to higher cargo throughput rose 7% to 13.6m tonnes that drove up its segment's PBT by 15%. On the other hand, its toll revenue and PBT fell 15% and 62%, respectively, due to lower traffic volume while despite lower revenue (-14%), its manufacturing and quarrying's PBT rose 3% on higher operating efficiency.

The key takeaways from its conference call yesterday are as follows:

1. YTD, it has secured a total of RM2.1b new construction jobs, against its guided RM5b job wins for FY25. The management is confident of achieving it given its current tender book which includes: (i) RM1b civil servant housing project in Nusantara, (ii) 2-3 data centre jobs, and, (iii) two warehouse projects.
2. The JRL acquisition does not need shareholder approval but it is subject to due diligence and IJM expects to conclude the deal within three months. IJM will own an effective 30% equity stake in JRL (see Page 3). The GBP50m investment (IJM's portion for GBP30m) will be used to subscribe the newly issued JRL shares, making IJM the single majority and only institution shareholder alongside the two key shareholders.
3. The GBP50m investment will address JRL's liquidity issues following aggressive expansion in recent years. Its net gearing jumped to 1.03x at end-2023 from 0.10x at end-2021. This has contributed to cost overruns. It reported a loss after tax of GBP25.4m in FY23 (FYE: Dec) and restated its FY22 results to reflect a loss after tax of GBP36.0m due to provisions for legacy projects. (see Page 4) 4. However, a turnaround is evident, as JRL achieved a PAT of GBP10.3m in 8MFY24. After a summary assessment, IJM believes that the worst is over for JRL.
4. This is a strategic synergistic investment and mutually beneficial for both IJM and JRL. JRL's capability to deliver up to 80% of project value through its in-house companies and its expertise in rail-adjacent and over-railway developments aligns well with IJM Land's JV with Network Rail Property to redevelop railway sites. In addition, IJM can support JRL in sourcing material and resources, while upscaling it into a higher tier contractor.

In our view, the acquisition creates synergies for IJM Land's expansion in the UK and provides IJM with immediate entry into the developed UK construction market. The acquisition price, at a forward PER of 7.4x, appears reasonable and it is a relatively small-scale acquisition that will not strain IJM's balance sheet. (refer to our report Entering the UK Construction Market dated 26 Nov 2024).

Outlook. We expect a significant revitalisation of the construction sector from: (i) the finalisation of RM10b Penang LRT Mutiara Line and several flood mitigation projects, and (ii) the vibrant private sector construction market, underpinned by massive investment in new semiconductor foundries and data centres. IJM is eyeing, among others: (i) New Pantai Expressway (NPE) expansion (>RM1b), (ii) civil servant housing project in Nusantara (>RM1b), (iii) building jobs for semiconductor foundries and data centres, (iv) infrastructure projects such as Penang LRT Mutiara Line, Blue Line for Kuching ART and Sarawak Sabah Link Road.

Forecasts: Maintained. We have yet to incorporate JRL into our forecasts which will be JV accounted.

Valuations. We maintain our SoP-driven TP of RM3.16 (see Page 4) on unchanged 22x PER valuation for its construction business, which is in-line with our valuation for big cap construction companies, i.e., GAMUDA (OP; TP: RM10.80) and SUNCON (MP; TP: RM4.52). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6).

Investment case. We like IJM for: (i) it is poised to garner a slice of action in the Penang LRT Mutiara Line given its involvement in the previous LRT projects, (ii) its strong earnings visibility underpinned by an outstanding construction order book of RM6.4b and new property sales of RM613m, (iii) Kuantan Port's position as the largest port in the East Coast capturing export and import activities growth, and (iv) the potential divestment of its toll road to lighten its balance sheet and recycle capital acting as a re-rating catalyst. Given the recent share price weakness, we upgrade the stock to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) sustained weak construction jobs flow, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rising cost of building materials.

Source: Kenanga Research - 28 Nov 2024