IJM banking on construction for FY17 growth

SUBANG JAYA (Aug 25): With the outstanding order book at an all-time high and more infrastructure contracts being dished out, IJM Corp Bhd said its construction division can make up for the slowdown in the property business.

Its chief executive officer and managing director Datuk Soam Heng Choon (pictured) expressed confidence that the construction business will surpass its order book replenishment floor target value of RM2 billion for the current financial year ending March 31, 2017 (FY17).

“We added roughly RM1.7 billion to our order book in the first three months of this financial year,” he told reporters after IJM Corp’s annual general meeting yesterday.

“We have an annual churn target of RM2 billion to RM2.5 billion. I think we can surpass the RM2 billion [target] easily this year,” he said.

Shortly after the diversified conglomerate’s FY16 ended on March 31, 2016, IJM Corp won a package for the second line of Mass Rapid Transit (MRT2) worth RM1.47 billion. It will also build the breakwater structure of Kuantan Port, valued at roughly RM198 million.

Both of these made up part of its RM8.6 billion outstanding order book, a record high for IJM Corp.

Winning more construction jobs is crucial for IJM Corp to recover from the slowdown in Malaysia’s real estate sector, which resulted in its property development business’ pre-tax profit plummeting by 67.8% to RM159.29 million in FY16.

The property development division had been IJM Corp’s biggest earnings contributor until last year.

For the first quarter ended June 30, 2016 (1QFY17), IJM Corp’s construction segment’s pre-tax earnings jumped by 23.6% to RM50.11 million. Property development’s, meanwhile, fell by 60.22% to RM19.92 million.

Its construction business’ revenue jump of 131.53% to RM494.103 million also augured well for IJM Corp, given that the margins of this business are thinner than those of property development.

“Our guidance for the blended pre-tax margin of [the] construction division is between 6% and 9%. Building jobs get around 6%, and infrastructure 9%,” said Soam. Its building order book is less than RM1 billion, he added.

“After the release of the 11th Malaysia Plan, we are of the view that there will be more infrastructure jobs coming out. There are still the third line of light rail transit, balance of MRT2 packages, and MRT Corp Sdn Bhd is already looking to start planning for MRT3,” said Soam.

He said IJM Corp had tendered for highway concession jobs in India. As they are on a basis of build, operate and transfer, Soam said, this is to ensure long-term growth in recurring income.

“The National Highways Authority of India tenders out 8,000km to 10,000km of highways every year. We will bid for locations that are familiar to us,” said Soam.

IJM Corp’s land bank is about 4,700 acres (1,902ha). He said as property sales are slowing down, the group is mulling to develop some of its land for investment purposes.

For its investment in the Malaysia-China Kuantan Industrial Park (MCKIP), its subsidiary IJM Land Bhd may sell or lease properties in the 3,000-acre industrial park. The company is part of a consortium with Sime Darby Property Bhd and the Pahang state government, which owns a 51% stake in MCKIP.

The rest is held by a consortium owned by the Chinese government.

Soam expects the plantation division to fare better in FY17, with crude palm oil (CPO) prices trending higher and normalising. Its fresh fruit bunch production is also growing, despite the El Nino climate razing many planters’ yields, as IJM Corp’s Indonesian oil palm trees are only reaching their maturity.

CPO prices averaged RM2,100 a tonne in FY16, said Soam. Currently, the commodity is trading within the range of RM2,600.

In 1QFY17, IJM Corp’s net profit fell by 65.71% to RM115.52 million, from RM336.87 million a year earlier.

Revenue rose 11% to RM1.31 billion, from RM1.18 billion, mainly because of the construction division’s substantial jump.

Apart from the underperformance of its property business, IJM Corp’s lower profit in the quarter was because it recognised a one-off gain last year from selling its 74% stake in Jaipur-Mahua Tollway Pte Ltd.

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This article first appeared in The Edge Financial Daily, on Aug 25, 2016. Subscribe to The Edge Financial Daily here.