IJM Corp - Buy this defensive contractor

Buy this defensive contractor

• 3QFY11 lifted by gain from AEON sale
• Construction and manufacturing arms to capitalise on robust contract pipeline
• BUY, nudged down SOP-derived TP to RM7.30

3QFY11 included AEON gain. 3QFY11 net profit of RM132m (+58% yoy, +11% qoq) included a one-off RM63m gain from the sale of AEON, Melaka. This takes 9MFY11 profit to RM342m, in line with our and consensus estimates. Besides property, the key earnings driver for the quarter was its Plantations, which pretax profit grew 16% yoy to RM60m (27% of group pretax) driven by higher CPO prices. Construction pretax profit and margins were relatively flat qoq at RM10m and 5%. Despite legacy jobs being depleted, margins could take another 1-2 quarters to normalize as key projects have yet to ramp up fully.

Expect more robust property and construction earnings. 9MFY11 property sales of RM1bn, if annualised, exceeds the RM1.2bn peak sales in FY10. Sales momentum will remain strong in 4QFY11 (Jan-Mar) with S&P agreements for two key projects - Light Collection 2 (GDV RM320m; 65% sold) and Maritimes Service Suites (GDV RM150m, 100% sold) in Penang launched in Dec-10 – currently being signed. IJM’s orderbook is now RM4bn with >RM2bn new wins in 2010. The largest outstanding tender is for the second phase of LRT extension worth >RM2bn – that will close end-February and we expect IJM to be a strong contender. We also expect its construction and manufacturing arms (41% of SOP) to be key beneficiaries of the LRT extensions, MRT and six new highways.

Reiterate BUY, TP nudged down to RM7.30. IJM remains a strong general proxy to the improving Malaysian economy, with all its key divisions doing well. We raised FY11-FY13F earnings by 1-3% after accounting for the recent upgrade to IJMP’s earnings. But our SOP-derived TP is cut to RM7.30 because IJMP’s TP was recently downgraded.