Thursday 28 Mar 2024
By
main news image
IJM Corp Bhd is part of a consortium which just bagged the RM1.3 billion tunnelling portion of the Pahang-Selangor raw water transfer project. The consortium comprises Shimizu Corp, Nishimatsu Construction Co Ltd, UEM Builders Bhd, and IJM Corp’s construction unit, IJM Construction Sdn Bhd. It is estimated that with a 20% stake in the project, IJM’s share of the contract will come in at RM260 million.

The water transfer project, located in central Peninsular Malaysia, is aimed at moving raw water from the Semantan River through a transfer tunnel to the Selangor/Kuala Lumpur region for domestic and industrial use, in anticipation of future water scarcity. Construction of the 44.6km tunnel is expected to take five years.

Since IJM secured the project, analysts have turned upbeat about its chances of clinching more jobs. They also like the stock for its below-average valuations.

As for the company’s income distribution, analysts have estimated decent returns for shareholders. Maybank IB is forecasting a 62.6% dividend payout ratio for FY2009F while AmResearch and OSK Research are projecting a dividend yield of 5.7% and 4.7% (both based on a share price of RM5.30) respectively.

More contracts are expected to flow through to IJM, especially from the government’s various economic development measures, such as the Ninth Malaysia Plan and the RM67 billion stimulus package.

Coupled with its sizeable outstanding order book, the construction-cum-infrastructure group, which also has interests in property development, building materials, plantations and toll roads, has a promising outlook despite the economic slump.

AmResearch says IJM’s tunnelling project will boost its outstanding order book to around RM4.8 billion, or 2.2 times the construction revenue of its FY2008 ended March 31. It also reckons that by winning the deal, IJM’s consortium is in a good position to secure additional works in  the inter-state water transfer project, believed to be worth between RM2 billion and RM3 billion, while IJM itself could secure up to RM59 billion more of infrastructure jobs.

“This includes the Klang Valley light rail transit upgrade, the West Coast Expressway, the extension of Besraya highway and the new low-cost carrier terminal in Sepang,” adds AmResearch.

The research house expects higher new contracts of RM1 billion and RM1.5 billion for FY2010F-FY2011F respectively from RM500 million and RM1 billion previously.

“On the overseas front, we gather that IJM is also in advanced discussion to secure a building contract in Abu Dhabi,” it adds.
OSK Research, which forecasts RM1.5 billion of new jobs for IJM in FY2010, says the company has secured around RM1.5 billion worth of jobs to date.

It has, however, downgraded its call on IJM to “neutral” from “buy” as it sees limited upside. Still, it has raised its construction earnings multiplier for the company to 11 times from 9 to reflect increasing sector optimism and marked to market IJM’s stake in its various listed entities, thus raising its target price for the stock to RM5.74 from RM5.17.

Maybank IB says IJM’s share price is trading at 12 times CY2010 earnings, which is below the average 15 times PER valuation of construction stocks in the early days of the construction upcycle in 2001/03.

It says IJM’s share price has risen 11% since April 23 and could continue to do well ahead of more positive news. “Our RNAV-based target price has upward revision potential on job wins of more than RM2 billion for FY2010,” it says.
The investment bank has a RM5.50 target price for the company.

Although Maybank IB sees negligible impact on IJM’s earnings from the water transfer project, assuming a gross construction margin of 8%, it says the job could contribute a net profit of RM15 million.

The company’s earnings could also get a boost from its diversified interests, given its exposure in plantations and property.
AmResearch reckons IJM is an indirect yet liquid play on the current crude palm oil (CPO) upcycle via its 55%-owned plantation arm IJM Plantations Bhd. “Thus, we project FY2011F plantation earnings to rise 10% to RM187 million on the back of a higher CPO price forecast of RM2,700 per tonne,” it says.

The research house says IJM’s earnings could also be enhanced by the maiden launch of The Lights, a property project, in 3QFY2009. IJM’s property assets, held under 77%-owned IJM Land Bhd, account for RM2.4 billion of the group’s sum-of-parts valuation.

AmResearch expects IJM’s construction margins to recover in 2H2010 after being compressed in the nine months to Dec 31, 2008, mainly due to softening raw material prices.

It says IJM’s construction earnings have fallen  76% y-o-y to RM33 million in 9MFY2009. Construction margins shrank to 2.5% versus 8.7% a year earlier, largely due to margin markdowns and losses in certain construction jobs as raw material prices hit record highs in 1H2008.

The research house has assumed higher average construction margins of between 3.6% and 5.2% for FY2010F-FY2012F versus 2.5% in 9MFY2009. It adds that its estimates are conservative compared to management’s 8% guidance for new contracts.


This article appeared in the Capital page, The Edge Malaysia, Issue 754, May 11-17, 2009.

      Print
      Text Size
      Share