This article first appeared in The Edge Financial Daily on March 10, 2020

IJM Corp Bhd 
(March 9, RM1.84) 
Upgrade to hold with a lower target price of RM1.93: IJM Corp Bhd’s current construction order book is at RM4.5 billion — 32% of which constitutes buildings, infrastructure (11%) and roads (56%) — declining from RM5.1 billion in the second quarter ended Sept 30, 2019 (2QFY20). Its outstanding tender book is about RM4 billion consisting of domestic projects equally split between infrastructure and building jobs, excluding The Light City project in Penang and the East Coast Rail Link. 

For the Light City, terms are being finalised with joint-venture partner Perennial Real Estate Holdings Ltd and an award worth about RM650 million to RM700 million of external construction works could materialise in 1QFY21. The management is confident in maintaining construction profit before tax (PBT) margins at between 6% and 9%, with material prices remaining conducive at the current levels. The construction PBT margin dipping to 5.9% in 3QFY20 was mainly due to higher finance costs concerning a highway project and is not expected to recur.

IJM Corp remains on track to achieve its sales target of RM1.6 billion for the financial year ending March 31, 2020 (FY20) after hitting sales of RM1.2 billion for the cumulative nine months of financial year 2020 (9MFY20). Sales have been mainly driven by projects such as Shah Alam 2, Seremban 2 and Rimbayu. For the first half of 2020 (1H20), IJM Corp is planning to launch projects with a cumulative value of about RM1.4 billion anchored by Rimbayu and Riana Dutamas. 

Separately, the management revealed the Royal Mint project in London with a gross development value of £200 million was handed over to buyers in 4Q19 with a take-up of 90%. For the company’s property segment, a comfortable PBT margins of above 10% are anticipated.

Its throughput at Kuantan Port remains healthy amid the Covid-19 outbreak. We understand from the management that Alliance Steel (M) Sdn Bhd — with an estimated throughput of seven to 10 metre freight weight tonnes per annum — is unaffected so far. 

Prospects for a sustained throughput growth are intact with new Malaysia-China Kuantan Industrial Park investors such as Maxtrek Tyres for the land clearing phase and NewOcean Energy pending an environmental assessment. Recent investors such as ICP and Camel Power (M) Sdn Bhd started operations on Aug 19 and Oct 19 respectively.

The highway remains a drag on IJM Corp’s bottom line as at 3QFY20, with share of associate losses of RM27.3 million, bringing the 9MFY20 sum to -RM73.8 million against 9MFY19’s RM30.8 million. The quarter saw sections 5, 9 and 10 of the highway opened in September and on Dec 19 respectively, in addition to section 8 opened on May 19, resulting in interest being expensed off (it was previously capitalised). 

We gathered all the opened sections began collecting toll fees in January and on March 20 upon which an amortisation recognition starts. 

Based on our understanding, sections 1, 2, 3 and 6 of the Selangor stretch are slated to open in 2021 and where we expect a pickup in the overall traffic volume. For the near term, we anticipate a widening loss contribution as a significant volume pickup is unlikely until the Selangor stretch opens.

Our FY20, FY21 and FY22 earnings forecasts are cut by 6.6%, 18.1% and 17.2% after factoring in widening losses from the share of associates offset by increasing our replenishment assumptions for FY21 from RM1 billion to RM1.7 billion after accounting potential wins from the ECRL and The Light City. — Hong Leong Investment Bank Research, March 9