Published on 17 Jul 2018.
RAM Ratings has reaffirmed the AA3/Stable rating of IJM Corporation Berhad (IJM or the Group)’s RM3 billion Sukuk Programme. The reaffirmation reflects the expectation that IJM’s credit fundamentals will remain intact based on its diversified business segments, despite its weaker financial performance in FY Mar 2018. The Group’s earnings for the year were below our expectations due to the persistently subdued performance of the Malaysian property industry, intense competition in the concrete piles segment, lower-than-expected earnings from the construction segment as new jobs were only procured in the second half of FY Mar 2018, and the high maintenance as well as depreciation costs that had eroded the plantation segment’s earnings. Despite this, IJM’s credit metrics held up and matched our expectations.
IJM benefits from a diversified business profile, with its core segments comprising construction, property, manufacturing and industry, plantation and infrastructure. As at end-March 2018, the Group’s construction contracts had increased to a record RM9.4 billion in outstanding value (end-March 2017: RM8.6 billion), primarily attributable to ongoing sizeable infrastructure projects such as the West Coast Expressway and the Mass Rapid Transit Line 2 as well as a number new construction jobs which were secured in fiscal 2018. Despite the expected slowdown of the construction sector in the near term, we anticipate the Group’s earnings to be sustained by its robust order book, complemented by its plantation segment’s contributions that will be supported by rising yields as more planted areas attain maturity over the next few years.
Following the change in government after the 14th General Election, the new administration has proposed numerous policies, including abolishing toll roads, reviewing or cancelling mega infrastructure projects, reforming the tender process for construction projects, and raising minimum wages; these could weigh on IJM’s earnings. While IJM’s commendable track record on clinching construction projects and its business resilience would help it weather such challenges, details on these proposed policies are still scant and we remain cautious about any potential implications. Notably, IJM’s diversified business lines will allow it to remain buoyant throughout different industry cycles.
As at end-March 2018, IJM’s debt load remained relatively unchanged at RM5.9 billion (end-March 2017: RM6 billion), approximately 19% of which was concession-related and non-recourse to the holding company. After stripping off non-recourse debts and earnings from its infrastructure subsidiaries, the Group’s adjusted funds from operations debt coverage (FFODC) would stand at an adequate 0.14 times. Looking ahead, IJM’s adjusted FFODC is expected weaken to 0.13 times over the next two years given the headwinds affecting its key business segments amid the Government’s proposed new policies. While its debt-servicing ability is adequate, any acquisition or project that necessitates a corporate guarantee from the Group, or borrowing beyond our expectations, may strain its financial position.
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