AmWatch - IJM Corporation : Momentum rising into FY16F BUY, 4 Mar 2015

STOCK FOCUS OF THE DAY

IJM Corporation : Momentum rising into FY16F  BUY

We maintain BUY on IJM Corp with a higher fair value of RM8.20/share (vs. RM8.10/share previously), pegged at an unchanged 10% discount to its SOP value. This reflects its rising order book momentum moving into FY16F, while factoring in the divestment of up to a 40% stake in Kuantan Port Consortium (KPC), the concession holder for Kuantan Port, to China’s Guangxi Beibu Group.  

Just last week, IJM won the mandate to construct a new deep water terminal at Kuantan Port (Phase 1) worth RM1.2bil. The contract, which forms part of the Kuantan Port expansion programme, is to be completed within three years. This latest project lifts IJM’s total new contract wins to ~RM5.6bil (nearly RM2bil more than our previous FY15F new order book estimate), and puts the group on track to secure a record order book of RM7bil by early-FY16F. IJM Corp reported 9MFY15 core earnings of RM447mil (+32% YoY), which was slightly below expectations. We attribute the variance to the slower-than-expected work progress in 3QFY15 due to the severe floods in Peninsular Malaysia during the quarter. Our revised FY15F net profit projection is now RM605mil (-6%).

More importantly, we expect construction profit to surge to RM177mil in FY17F from RM139mil-RM142mil – as the impact of the newly-secured jobs, namely the West Coast Expressway (WCE), swings into full-motion. Reflecting better work progress and higher-value infrastructure jobs (e.g. WCE and Kuantan Port Expansion), we expect construction margins to rise further to 8% by FY17F from 6.8% in FY16F.

The 9MFY15 construction margin rose to 16% (3QFY15: 10%), which we believe, was mainly due to the completion of certain key infrastructure projects. We expect margins to normalise over the next two to three quarters. We continue to rate IJM as our top-large cap construction pick for its well-rounded earnings, backed by prospects of a ~RM7bil record order book moving into FY16F.

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