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

Apr 16, 2013 -

MARC has affirmed its MARC-1/AA- ratings on IJM Corporation Berhad’s (IJM) Commercial Paper/ Medium Term Notes Programme (CP/MTN) with a stable outlook.

The affirmed ratings reflect IJM’s moderate consolidated business risk profile which is underpinned by its good business diversity and adequate market positions in the five sectors in which the group is active: construction, property, plantation, building materials and infrastructure. The ratings also incorporate IJM’s satisfactory financial performance to date, which has been characterised by broadly stable operating margins, balanced and recurring dividend income at the holding company level and adequate financial flexibility.

Credit considerations that counterbalance the aforementioned positives include IJM’s earnings exposure to the cyclical and competitive construction markets, the group’s high growth-related capital expenditures over the near to intermediate term, the holding company’s financing needs to address significant forthcoming debt maturities, and downside risks arising from IJM’s strategic investment in oilfield services holding company Scomi Group Berhad (Scomi).

For the financial year ended March 31, 2012 (FY2012), IJM’s construction operations reported improved earnings after posting an operating loss of RM79.2 million in FY2011. IJM’s construction business accounted for 32% of total divisional revenue for the financial year ended March 31, 2012 (FY2012) and contributed 8% of total divisional pre-tax profits. Its construction business order book of RM3.7 billion as of end-June 2012 provides earnings visibility of up to four years; however, margins are expected to remain fairly tight and the construction business environment abroad remains very difficult.

IJM’s property, plantation and industry (building materials) operations have been providing the bulk of the group’s earnings, contributing 37%, 20% and 16% respectively of total pre-tax profits in the nine months to December 2012, or 9MFY2013 (full year FY2012:  35%, 27% and 17%). The diversity of IJM Group’s operations provides a degree of stability to consolidated earnings. Around half of IJM’s dividend income in FY2012 was provided by its property and plantation businesses which are undertaken through its listed subsidiaries IJM Land Berhad and IJM Plantation Berhad (IJMP). Going into FY2013, MARC anticipates continued earnings momentum from IJM’s property operations which saw higher revenue and pre-tax profit in 9MFY2013. Unbilled sales of RM1.2 billion as at end-June 2012 and the observed improvement in operating margins in FY2013 provide support for a relatively stable earnings trajectory.

IJM’s plantation business, meanwhile, is actively expanding its oil palm planted acreage in Indonesia. It has incurred RM767.9 million up to end-2012 on plantation development in Indonesia and has committed another RM351.5 million in capital spending as of end-2012. The Indonesian operations are expected to make meaningful earnings contributions from FY2016 onwards only owing to its large acreage of immature oil palms at present. Its plantations in Sabah produced 97% of the plantation division’s output of oil palm fresh fruit bunches (FFB) in FY2012. Revenue and pre-tax profit declined in 9MFY2013 by 23% and 37% respectively year-on-year due to a drop in sales volume and crude palm oil (CPO) and palm kernel oil (PKO) prices. MARC expects IJMP’s heavy plantation development spending over the next two years, volatile CPO and PKO prices and high palm oil inventory levels to weigh on its free cash flow generation and dividend upstreaming ability in the immediate term. However, IJMP’s low gearing of 0.19 times as at 9MFY2013 would provide some flexibility to the plantation company to raise funding for its capital expenditure. 

IJM’s industry division was the group’s third largest earnings contributor in 9MFY2013 and FY2012. Its 9MFY2013 results were affected by a lower sales volume of piles due to delays in the progress of projects as well as lower export sales. The industry division’s revenue and earnings are sensitive to the level of general construction activity in domestic and regional markets. The earnings momentum of IJM’s infrastructure division should be sustained by continued growth in concession revenues absent adverse movement in exchange rates. The 9MFY2013 results of the group’s tolling, ports, power and water concessions were aided by higher port revenues, traffic growth on tolled highways and reduced unrealised foreign exchange losses arising from the US dollar-denominated borrowings used to finance IJM’s investments in India. The infrastructure division contributed 11% of the total divisional pre-tax profits in FY2012.

At the consolidated level, IJM has exhibited a fairly stable earnings performance that reflects the diversity of its operations. For 9MFY2013, it posted a pre-tax profit of RM621.7 million on revenue of RM3.4 billion (9MFY2012: RM610.8 million and RM3.3 billion respectively). As of end-2012, the group’s capital commitments totalled RM972.6 million while forthcoming debt maturity requirements at the holding company comprised MTN maturities of RM100.0 million in May 2013 and RM200.0 million in October 2013. MARC believes that IJM’s borrowing availability of RM250.0 million under the rated debt programme should provide sufficient financial flexibility to fund the holding company’s MTN maturities of RM100.0 million in May 2013 and RM200.0 million in October 2013. However, the group’s significant planned capital expenditure is expected to impede free cash flow generation and dividend upstreaming from subsidiaries, and will likely necessitate significant external funding. At the same time, the rating agency notes that IJM has subscribed to Scomi’s RM110.0 million of redeemable convertible secured bonds. MARC believes that the aforementioned transaction creates additional risks for IJM in that it will likely exert pressure on the holding company’s balance sheet and financial flexibility. The rating agency also considers the holding company dividend distributions to be high relative to its discretionary cash flow.

The stable rating outlook is predicated on IJM maintaining a business risk profile consistent with its current ratings, as well as an acceptable operating performance, and sound credit protection measures including a supportive capital structure.

Contacts:

Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;

Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my.