WHILE pure construction stocks have been trending upwards, IJM Corp Bhd — whose businesses include property development, infrastructure and plantation, apart from construction — seems to be lagging behind. It has risen only 8% year to date compared with smaller players that have gained as much as 18%.
Nevertheless, as one of the largest construction counters on Bursa Malaysia, IJM still has its appeal. Its construction division continues to perform well and to replenish its order book. Last month, it secured a RM1.16 billion contract to build a retail mall in Kuala Lumpur and a highway construction job in India under a concession agreement. With these wins, the group’s outstanding order book has reached a record high of RM8.8 billion.
“Construction will be the main driver of our top line,” says CEO and managing director Datuk Soam Heng Choon. “Our current order book is expected to last us three years and generate revenue of over RM2 billion a year.”
Soam expects IJM to maintain momentum as he sees more jobs being put out to tender in mega construction and infrastructure projects such as the RM55 billion East Coast Rail Link (ECRL), the RM8.9 billion Gemas-Johor Baru double-track railway and the RM9 billion light rail transit Line 3.
He also does not rule out the possibility of the company tying up with Chinese parties to win more contracts. “In a world that requires more technology and expertise that we don’t have, for instance, in high-speed rail, we have to learn from them,” he tells The Edge.
As for the southern double-track railway and ECRL, which have been awarded to Chinese companies, he says these are parties IJM is familiar with as it is partnering several firms from the republic to develop Kuantan Port.
Kuantan Port Consortium Sdn Bhd, in which IJM holds a 60% stake while Guangxi Beibu International Port Group owns the remaining 40%, is investing close to RM3 billion in doubling the port’s capacity and upgrading its infrastructure.
The ECRL project has been awarded to China Communications Construction Company Ltd (CCCC) while the southern double-track railway has been awarded to a consortium comprising China Railway Construction Corp Ltd, China Railway Engineering Corp and CCCC.
“The ECRL is in the initial stage now, so we will look at jobs that we can do because the railway is going to be linked to Kuantan Port. So, there is a lot of synergy for us,” Soam observes.
Last month, IJM announced the setting-up of wholly-owned subsidiary, Dewas Bypass Tollway Private Ltd, in Madhya Pradesh to undertake the widening and upgrading of Dewas Bypass Road from Ujjain Dewas Junction to Indore Junction into a four or six-lane highway. A concession agreement on the project was also executed.
Meanwhile, another wholly-owned subsidiary, IJM Construction Sdn Bhd, was awarded the job to design and build a mall for MFBBCC Retail Mall Sdn Bhd. The construction period is 40 months.
According to Soam, the Indian contract is worth only about RM180 million but it comes with a 25-year concession. “This is a small job because it involves only 19km. We will start work in August. The IRR (internal rate of return) should be in double digits,” he says.
As for the MFBBCC mall, the margin should range from 5% to 8%, according to Soam.
Despite IJM’s record order book, Nomura Research analyst Tushar Mohata recently downgraded the company to “neutral” after it reported results that were below expectations.
Dragged down by a lower contribution from Kuantan Port operations, which were affected by the recent moratorium on bauxite mining in Pahang, and a lacklustre property market, IJM’s core net profit for the nine months ended Dec 31, 2016 (9MFY2017), dropped 8.2% year on year to RM394.7 million.
“The counter lacks catalysts. We prefer pure construction players as they are cheaper than conglomerates and have a lower base. Moreover, they do not have property divisions,” Tushar tells The Edge over the phone.
Soam believes the group’s financial performance will improve in FY2018 because of an increase in construction activity and better crude palm oil prices.
“Our plantation sector is riding the higher CPO prices. There is lower crop production but our Indonesian acres are increasingly coming of age. In Indonesia, 77% of our palms are only about four years old. So, in another three years, these will all be mature,” he says.
The worst is over for Kuantan Port, he adds, because once Alliance Steel (M) Sdn Bhd starts production at the end of this year, it will provide sustainable cargo for the port.
Amid the property downturn, Soam expects the group’s property sales to remain flat next year. “We will adjust our property launches to the market. We just launched a project in Penang with over 60% take-up. In this market scenario, I would say that is quite commendable.”
IJM had recorded property sales of more than RM1 billion as at 9MFY2017 and expects to end the year with RM1.4 billion. The group’s un-built sales stood at RM1.7 billion, which is likely to last the group one to two years.
UOB Asset Management (M) Sdn Bhd CEO Lim Suet Ling is positive on the construction sector but neutral on IJM, preferring the small to mid-cap contractors. “Generally, the impact of similar-sized contract wins is more significant on the order book and earnings of small-sized contractors than the large ones. Secondly, the valuations of small to mid-cap contractors are more attractive than those of their larger peers,” she explains.
For a fund manager with a foreign asset management firm, however, IJM is still his top pick because of the expected rollout of mega construction projects in the second half of the year. “It’s true that analysts prefer pure construction players but when foreign funds want exposure in the construction sector, IJM and Gamuda Bhd are their focus. Foreign funds are buying banking stocks now but when they switch to the construction theme, these conglomerates will likely benefit,” he tells The Edge.
He also prefers IJM to Gamuda because it is more diversified and its recurring income is better.
Group open to selling Scomi stake
IJM Corp Bhd, the single largest shareholder in Scomi Group Bhd, is open to selling its 24.59% stake in the oil and gas solutions provider, says its CEO and managing director Datuk Soam Heng Choon.
“There is a lot of interest from various parties, asking if we want to sell. They have their reasons for why they want the stake. Our options are open,” he comments.
According to Soam, when IJM invested in Scomi, the economy was riding a booming oil and gas sector. But as the sector is no longer in favour now, it is looking at selling the stake at the right price. Although crude oil prices are recovering, IJM has no plan to hold on to the stake. Indeed, its disposal tops Soam’s list of divestments.
IJM became the largest shareholder in Scomi after converting bonds to the oil and gas company’s shares in March last year.
To recap, the year was 2012 and IJM was looking for a vehicle to enter the sizzling oil and gas industry. It took up 119.11 million shares or 9.6% of Scomi in a placement for RM39.31 million or 33 sen per share. It also subscribed for three-year zero coupon redeemable convertible secured bonds with an aggregate nominal value of RM110 million.
“If you look at the investment, it was not big; it was only over RM100 million overall. That is something we can streamline when reducing non-core and low-yield assets,” says Soam, who has always had plans to divest the group’s non-core assets.
Based on Scomi’s closing price of 18 sen last Thursday, the stake is worth RM84.24 million.
As at March 16, Scomi’s two other major shareholders were Kaspadu Sdn Bhd and Amadia Investment Ltd, with 8.99% and 7.97% stakes respectively. The oil and gas player owns 65.64% and 72.33% respectively of Scomi Energy Services Bhd and loss-making Scomi Engineering Bhd.
Scomi, which suffered losses from FY2010 to FY2013, returned to the black in FY2014 with a net profit of RM4.96 million. However, it slipped into the red again recently.
Hit hard by weak oil and gas activity, the group posted a net loss of RM39.55 million for the nine months ended Dec 31, 2016 (9MFY2016), compared with a net profit of RM20.46 million in the previous year.
Other than its stake in Scomi, IJM is also open to selling its concessions, including its 50%-owned Kajang-Seremban Highway (LEKAS). “Anything is for sale at IJM, no sentiments attached,” Soam says, adding that there are investors who are keen on LEKAS.
The concession, he notes, will continue to lose money as it will take awhile for people to migrate to areas near it.
The group had monetised a couple of its Indian toll roads for a total gain of RM307.48 million as at FY2016. “They paid us good prices; we thought it would be better for us to redeploy our capital elsewhere. We took some of the money and put it into the Kuantan Port expansion and some of it we reinvested in new toll roads,” says Soam, who sees the recycling of capital as discipline in managing the balance sheet.
As at Dec 31, 2016, the group was in a net cash position of RM267.49 million.
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