IJM Corporation - Construction picking up pace BUY

We maintain our BUY call on IJM Corp with its fair value nudged slightly upwards to RM8.20/share (from RM8.15/share) on an unchanged 10% discount to its NAV, as we roll-forward its valuation base to FY16F. FY15 core net profit was up marginally (+3% YoY) – slightly lower than our forecast.

During the FY, IJM’s construction division made some progress with a 10% YoY gain in pre-tax profit. Construction margins doubled to ~19% in FY15 although this was bumped up by the finalisation of accounts for certain jobs. Management guided for sustainable margins of 6%-9%. With new jobs (e.g. West Coast Expressway) picking up pace, we project construction profits to rise to RM220mil-RM280mil for FY16F-18F vs. RM185mil in FY15 (FY14: RM185mil).

Core property earnings slipped c.8% in tandem with slower sales and work progress. Amid a tougher property market, new sales (ex-UK) was lower in FY15 at ~RM1.8bil vs c.RM2.2bil a year ago. 4QFY14 new sales was RM500mil against RM1.7bil worth of unbilled sales.

Profit for the industries division fell 14% YoY despite a higher turnover (+4% YoY). This was largely due to a higher product mix of smaller-sized piles, which fetch lower margins.  Similarly, plantation profits fell 18% YoY (RM89mil) on lower CPO prices realised (RM2,289/tonne in FY15 vs. RM2,385/tonne). Kuantan Port’s continued growth was masked by higher start-up costs for the Besraya East Extension (tolling commenced last May).

Looking ahead, the outlook for IJM appears bright moving into FY16F. Enquiries for job opportunities gathered steam in the past six months, even before the unveiling of the 11th Malaysia Plan (11MP). Backed by a record order book of RM7bil, IJM is eyeing a few job prospects such as the upcoming MRT 2 line, Klang Valley LRT 3, Gemas-JB double tracking, Pan Borneo Highway, and the Penang Transport Master Plan.

The completion of Phase 1 of the Kuantan Port expansion in two years’ time is timely, as it coincides with the delivery of a new steel mill by China’s Guangxi Beibu Group (IJM’s partner in the port’s concession). This new mill alone is expected to add c.7 million tonnes to Kuantan Port, which is operating near full-capacity.

IJM has lined up c.RM3bil worth of new property launches – although the actual quantum will depend on market conditions. It hopes to kick off the maiden commercial parcel of the Lights by August, after having recently tied-up with Singapore’s Perennial group.

We envisage more NAV/share upside to come from:- (i) a higher GDV of RM5bil for Sebana Cove (our assumptions: RM2.5bil); and (ii) possible inclusion into the FBM KLCI 30 Index (next review in June).