IJM Corporation Bhd
(July 22, RM7.06)
Maintain buy with unchanged target price of RM8.00. IJM announced that it has entered into a share purchase agreement with MAIF Investments India to dispose of the Swarna Tollway for a cash consideration of 10 billion rupees (RM596.8 million).

Based on IJM’s effective stake of 98.5% in the tollway, its attributed proceeds would amount to RM587.8 million. The expected gain on disposal is estimated at RM92.6 million.

IJM’s decision to dispose of the Swarna Tollway is not surprising as management previously guided that it will continue to monetise its Indian assets should the right opportunity arise. 

In financial year 2014 (FY14), IJM concluded the sale of a 36% stake in the Trichy Tollway for 1.1 billion rupees. Late last year, IJM also announced the proposed disposal of the Jaipur-Mahua Tollway for 5.3 billion rupees.

In FY14, IJM netted RM640 million in cash from the disposal of several assets such as the Trichy Tollway, Kemaman Port and Kuantan Port. 

This resulted in a special dividend of 10 sen being declared for FY14 on top of the usual 15 sen. 

As such, we do not discount the possibility of another special dividend for FY16 given that the cash influx from the disposal of Swarna is almost similar to that of FY14.

Following strong job wins of RM5.7 billion in FY15, IJM sits on an all-time high order book of RM6.5 billion. 

This implies a superior cover ratio of 6.8 times on FY15 construction revenue which will propel earnings growth going forward.

Work on its largest job, the RM2.8 billion West Coast Expressway, has begun and the open tender portion (RM2.2 billion) will be called early next year in which IJM will be bidding for as well.

Given its record high order book, execution is a risk to watch out for.Slower sales given the softening property market is another risk.

We like IJM as a large-cap proxy to the construction space.

After a long lull for its construction division, things are set to stage a strong rebound following its record high order book in place. 

The concluded privatisation of IJM Land is also expected to be earnings per share accretive, which we estimate to be 3% for FY16. — Hong Leong Investment Bank Research, July 22.

This article first appeared in The Edge Financial Daily, on July 23, 2015.