IJM Corp Bhd
(Nov 26, RM6.81)
Maintain “buy” with a target price (TP) raised to RM7.60: IJM Corp’s first half of financial year 2015 ended Sept 30 (1HFY15) core net profits, after adjusting for one-offs, came in below our and consensus’ full-year estimates.

The core net profit of RM257.3 million accounted for 38.5% of our and 38.9% of consensus’ full-year estimates. The weaker-than-expected earnings are mainly attributable to the lacklustre growth across most of its business divisions.

That said, we reiterate “buy” as its current FY16 forecast (F) price-earnings ratio (PER) of 13.6 times has yet to fully reflect its multi-year construction projects (West Coast Expressway and Kuantan Port extension) and strategic property land bank. We raise our sum-of-the-parts TP to RM7.60 as we roll over our valuation to FY16, implying 15.4 times FY16F PER.

On May 14, IJM entered into a heads of agreement with Silk Holdings Bhd to acquire a 100% stake in another expressway Sistem Lingkaran-Lebuhraya Kajang — for a tentative purchase consideration of RM398 million in cash.

However, the company announced on Monday that the deal has been aborted as both parties could not agree on valuation. The management did not discount the possibility of trying to renegotiate the acquisition price but would insist on sticking to its internal estimates valuation-wise so that IJM would not overpay for the asset.

Total unbilled property sales remained healthy at about RM1.8 billion, which should provide earnings visibility for the next three years. We are particularly excited about its project in Johor — Sebana Cove — which has a gross development value of RM4 billion on 1,188 acres (481ha) of land.

This is because Petroliam Nasional Bhd’ refinery and petrochemical integrated development (Rapid) project would generate genuine demand for properties located near to the Rapid facilities. The management guided that it has lowered its property sales target to RM2 billion, which is in line with our projected sales target.

Following yesterday’s analysts’ briefing, we understand that despite the company having a strong order book, most of the construction earnings would only be recognised in FY16.

Hence we lower our FY15 earnings by 10.2% but leave our 2016F earnings unchanged as we believe that IJM’s earnings momentum should pick up significantly from 2016F onwards, backed by its existing order book of RM5.1 bilion, which could be boosted to RM6.1 billion by the end of this year once the Kuantan Port extension project is awarded to IJM. — UOB KayHian Research, Nov 26

This article first appeared in The Edge Financial Daily, on November 27, 2014.