IJM a likely beneficiary of RM55 bil ECRL project packages

IJM Corp Bhd (Aug 24, RM3.46)

Maintain add with an unchanged target price (TP) of RM3.87: IJM Corp Bhd’s first quarter of financial year 2018 (1QFY18) annualised core net profit made up 76% of our and 78% of consensus’ forecasts. We view this to be in line with expectations as IJM’s construction billings tend to pick up in the latter part of the year. Group core net profit in 1QFY18 rose by 12% year-on-year (y-o-y) to RM131.3 million, thanks to its infrastructure segment (ports and highways). This was partially offset by weaknesses in plantations and industries, dragged by higher raw material prices and maintenance costs. The absence of dividends was expected.

IJM’s infrastructure segment overtook construction to become the group’s largest pre-tax profit contributor in 1QFY18, at 37% of the overall pie. On a y-o-y basis, pre-tax profit surged by 211% from RM20.8 million to RM64.6 million. This was made possible by a 73% y-o-y surge in IJM’s cargo to 5,114,000 freight weight tonnage in the quarter, and stronger contribution from the segment’s associates. This was a positive surprise, given that the bauxite moratorium in Pahang is still in place.

The plantation segment’s pre-tax profit in 1QFY18 fell by 36% y-o-y to RM24.8 million, despite a 32% y-o-y rise in revenue. This was due to production cost pressures from more young mature areas using up full fixed maintenance and overhead costs set against start-up crop yields. Despite the benefits of higher crude palm oil prices, we suspect that this could continue to weigh on plantation earnings in subsequent quarters.

Year to date, IJM has secured two construction jobs, collectively valued at RM1.6 billion. This is inching closer to our RM2 billion new win assumption, and halfway past its RM3 billion order book replenishment target. To recap, IJM won a RM1.2 billion contract in February for a shopping mall at the Bukit Bintang City Centre development. Last month, it won a RM451 million job to build UOB Tower 2.

We believe IJM could emerge as a likely beneficiary of one of the packages for the RM55 billion East Coast Rail Link (ECRL) project, due to its track record in rail construction and strong presence in the East Coast Economic Region corridor. This could lead to a potential upside to its current outstanding order book of RM8.7 billion. We believe IJM is one of the earlier beneficiaries of the rail theme in 2017/18.

We retain our FY18-FY20 earnings per share forecasts. We maintain our “add” recommendation and TP, still pegged to a 10% revalued net asset value discount.  — CIMB Research, Aug 23

This article first appeared in The Edge Financial Daily, on Aug 25, 2017.

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