MARC AFFIRMS MARC-1/AA- RATINGS ON IJM CORPORATION BERHAD'S RM1.0 BILLION CP/MTN PROGRAMME

Feb 3, 2012 -
MARC has affirmed its MARC-1/AA- ratings on IJM Corporation Berhad’s (IJM) RM1.0 billion Commercial Paper/Medium Term Notes Programme (CP/MTN) with a stable outlook. The ratings action incorporates the satisfactory operating performance of its plantation, property and infrastructure segments, as well as the holding company’s broadly adequate liquidity and favourable financial flexibility. The higher year-on-year pre-tax profits posted by the three segments in the financial year ended March 31, 2011 (FY2011) have helped to offset the losses of its construction segment and weaker performance at its industrial segment. MARC notes that there has been an easing of the pressure on the holding company’s cash flow and liquidity in FY2011 on account of higher dividends received from subsidiaries, the repayment of advances by subsidiaries and lower investment outflows.

Constraining the ratings is the cyclicality of its construction and property development businesses, the heavy capital spending required for its Indonesia-based oil palm plantation operations, as well as the drag on profitability exerted by IJM’s construction and toll road operations in India.

IJM is the holding company of IJM group which has core activities in construction, property development, manufacturing and quarrying, infrastructure concessions and plantations. IJM which continues to maintain a strong competitive position in the domestic construction sector has shown good order book replenishment in recent quarters with a RM3.75 billion outstanding order book as of end-June, 2011, of which domestic orders accounted for RM3.04 billion or 81% (March 2010: RM3.62 billion and RM2.15 billion respectively). MARC notes the improved outlook for revenue and profitability for the construction segment as well as its pre-tax profit of RM21.6 million for the six months to September 30, 2011 (1HFY2012) after posting losses of RM79.2 million for FY2011. The weak performance in FY2011 was mainly due to the provisions made against contractual claims, recovery of receivables and project losses in some of the group’s overseas projects.

The increasing earnings contribution from IJM’s property segment and the near-term earnings visibility that is provided by contracted or unbilled sales of IJM Land Berhad (IJM Land) continue to provide support for the group’s financial profile. IJM Land’s strong brand name, long track record of operation, land bank quality and moderate project concentration continue to afford relative resilience to pressures in the operating environment. Take-up rates for IJM Land’s recent launches in the high-end segment have been weak, nonetheless, this is likely to be somewhat mitigated by better demand for the group’s medium cost residential property offerings. IJM’s property segment registered a significantly higher pre-tax profit of RM289.7 million in FY2011 (FY2010: RM171.9 million) owing in part to a one-off RM63 million gain from the disposal of its investment property, Aeon Bandaraya Melaka.

IJM’s plantation operations are undertaken by IJM Plantations Berhad (IJMP) which benefited from higher crude palm oil (CPO) prices in FY2011 which averaged RM2,760 per tonne (FY2010: RM2,246). The favourable maturity profile of its Malaysian plantations suggests that production should remain broadly stable and sustain operating cash flow generation. At the same time, MARC expects free cash flow generation to be constrained by the high levels of plantation-related capital expenditure for IJMP’s Indonesian plantations. IJMP has incurred a total of RM355.0 million on plantation development in respect of its Indonesian plantation operations up to end-March 2011; another RM500 million of plantation-related capital spending is budgeted for the next two years. The expansion will be partly funded by borrowings to be taken up at the subsidiary level. No meaningful revenue is expected from IJMP’s Indonesian plantation operations in the near term given that mature crops occupy only 563 ha of the total cultivated area of 13,606 ha (FY2010: 5,306 ha).

The group’s infrastructure segment was the third largest contributor of group earnings in FY2011, after property and plantations. Of the group’s three domestic toll road concessions, Besraya Highway and New Pantai Expressway (NPE) registered improved performance while Kajang-Seremban Highway (Lekas) registered losses due to weaker-than-expected traffic growth. The group holds joint venture interests of 35% to 50% in three Indian tollways and holds 100% interest in two tollways. The tollways are in various stages of operation. Two of the five tollways are still in ramp-up phase, having commenced full tolling only in mid-FY2010, which is reflected in part in the tollway portfolio’s adjusted pre-tax losses of RM8.6 million after adjusting for net foreign exchange gains. MARC expects the earnings contribution of IJM’s Indian tollway investments to remain muted in the near term and notes that the group has entered into share purchase agreements to acquire additional stakes in two of the remaining three older tollways in the group’s portfolio of Indian tollway investments. On a positive note, the group’s infrastructure concession investments in domestic ports, power plant in Andra Pradesh, India, and water treatment plant in Vietnam continue to provide positive recurring income.

At the operating holding company level, significantly higher dividend income of RM164.5 million was enough to offset the decline in construction revenue to RM112.8 million in FY2011. As at March 31, 2011, there was a slight increase in IJM’s gearing at company level; total borrowings were higher at RM1,078.6 million, translating into a higher debt-to-equity ratio of 0.27 times (FY2010: 0.25 times).

Compared to FY2010’s negative cash flow from investing activities of RM443.5 million, however, IJM recorded positive cash flow from investing activities of RM127.1 million as a result of net repayment of advances from subsidiaries and higher dividend receipts. MARC notes IJM’s debt maturities of RM100 million and RM400 in FY2013 and FY2014 respectively, in relation to which the holding company’s cash and cash equivalents of RM147.2 million and good access to bank and bond markets provide assurance of its ability to meet its maturing debt obligations.

The stable outlook incorporates MARC’s expectation that IJM group will exhibit broadly stable operating performance and that sound liquidity and adequate cash flow coverage measures will be maintained at the holding company level in the next 12 to 18 months. Downward rating pressure could emerge if IJM were to make large debt-funded investments or provide funding support for its underperforming subsidiaries or associates that could adversely affect its financial profile.

Contacts:
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.