Nov 6, 2015

IJM – Maintain Buy

We visited IJM and gather that its: a) all-time high construction orderbook, which could still potentially grow; b) earnings from its Kuantan Port operations may positively surprise; and c) its property division could meet its RM1.5b sales target in spite of 1QFY16 recording only about RM300m in sales. Results from the following quarters could also see one-off gains due to completion of asset sales that have been announced. Maintain BUY. Target price: RM3.95. IJM remains our top pick.

ijm financial data 
• We recently met IJM Corp to receive its latest updates on the operations of its various businesses. We understand that although the company’s construction orderbook is at its all-time high, there could still be a possibility of further growth. Aside from that, the property division may do a major catch-up in terms of sales to reach its internal sales target of RM1.5b.

Orderbook at all-time high, but could still expand. IJM’s construction orderbook stands at about RM7b, which is at its all-time high level. Management is comfortable with this figure, but noted that it could still take on selective jobs if margins are attractive. According to media reports, IJM together with several other companies have been shortlisted by Prolintas to undertake the construction job of two major highways, including the Damansara-Shah Alam Expressway (DASH) and the Sungai Besi-Ulu Kelang (SUKE). Both have a combined construction value of RM9.5b.
Could also be one of the beneficiaries of the RM28b Pan Borneo highway. During the recent Budget 2016 announcement, the government unveiled that it is allocating about RM16.1b and RM12.8b for the Sarawak and Sabah stretches of the toll-free Pan Borneo highway respectively. While the Eastern Malaysian names would be the front runners of the construction jobs, IJM believes that it also stands a chance of clinching some of the projects given the massive size of the project which would need support from the Peninsula Malaysia contractors in order for the highway to be completed by the targeted year of 2021.
Building jobs are also ample.  We understand that IJM has been approached by several developers to undertake building construction jobs. We gather that the low cost environment currently has allowed IJM’s pricing to be more competitive compared with the lower tiered contractors. Hence, developers are choosing to appoint more established and financially strong contractors to minimise their development risks.

ijm key fiancial data
Property division could play a major catch-up in the following months.  As of 1QFY16, its property division recorded about RM300m in property sales, which represents only about 20% of management’s full-year sales target of about RM1.5b. We gather that in spite of the slowdown in the property market, IJM is confident of achieving its sales target this year, driven by its ongoing developments in Seremban, Klang Valley, Batu Kawan (Penang) and Pengerang (Johor).
Port operations are doing tremendously well.  IJM’s Kuantan Port is catered to handle about 26m tonnes of cargo yearly (before its expansion plans are completed in 2018 and 2022 respectively). Our channel checks gather that the throughput for 2015 could easily surpass the yearly optimum capacity for the port due to the intensified mining activities that are ongoing in Kuantan. In 1QFY16, the port contributed about RM66m in PBT, a strong growth from its 1QFY15 PBT of a mere RM28m.
The Light could further boost construction orderbook by RM2b.  IJM Land, a wholly-owned subsidiary of IJM Corp recently partnered with Perennial Real Estate Holdings Ltd to develop the commercial component of IJM’s highly successful The Light development in Penang. The 50-50 partnership would see the JV developing the 32.8 acres of land into an integrated mixed development with a shopping mall, residential and office towers, two hotels with a convention centre. IJM would benefit in two ways from this partnership including: a) land sale gain, and b) being the main contractor for the construction jobs worth about RM2b. Aside that, in the longer term, the mall would also provide an additional form of recurring income for the group.

• We trim our FY16 and FY17 forecasts by about 5% and 6% respectively after reducing our targeted property sales assumption from RM1.7b to RM1.5b and delaying the contribution assumption for its key construction jobs.
• Our earnings forecasts are based on core profit numbers, and do not include the one-off gains from the disposal of assets that is expected to complete this year, which includes: a) gain from the disposal of the Swarna Tollway in India (gain of about RM93m), and b) a disposal of 32.8 acres of land to a JV equally held by IJM Corp and Perennial Real Estate for the IJM Light commercial development
• Key risks include: a) execution risk, b) regulatory risk, and c) fluctuation in raw material prices which will impact margins.

• Maintain BUY with a SOTP-based target price of RM3.95. We believe that its multi-year construction projects (WCE and Kuantan Port Extension) coupled with its strategic property landbanks and concession assets would continue to grow shareholder’s value in the long run. Our target price implies 17x FY17F PE.
• The stock currently trades at 15x FY17F PE, slightly above its 10-year historical range of 14.5x. We continue to like IJM Corp for its strong construction orderbook as well as a portfolio of infrastructure assets that would provide the company with stable recurring income and cashflows.

• Winning of new construction jobs.
• Better-than-expected property sales.
• Development of new deep water terminal at Kuantan Port.

source: UOBKayHian 02/11 15