IJM Corp (HwangDBS Vickers Research) buy; target price RM6.00

Diversified infrastructure proxy

• No surprises expected for 4QFYMar10, 1Q11 last quarter with low margins

• Low-margin legacy projects completing, confident of RM2bn new orders ex-India

• BUY, SOP-derived TP of RM6.00

Construction division close to inflection point. We expect 4QFY10 net profit of RM87m (+3% q-o-q, +62% yo- y). The star division should remain property with FY10 sales of  RM1.2bn (RM750m in FY09) where, in past quarters, the strength was seen across all key states - Klang Valley, Penang and Sabah. With 1QFY11 (Apr-June) expected to be the last quarter with low construction margins of 2-3% as legacy jobs complete, IJM’s construction division is close to inflection point.

For FY11, newer contracts such as RM545m Grand Hyatt, RM640m Besraya and more recently RM247m for the Mukah access roads in Sarawak, should ensure stronger margins. We expect construction contribution to rise to 24% of pretax in FY11 vs 11% in FY10F as margins normalize.

RM2bn orders for FY11. Guidance is 33% higher than our RM1.5bn forecast (ex India). With the RM247m win in Sarawak, this leaves another RM1.8bn. Potential projects are the RM700m National Cancer Institute in Putrajaya, RM150m upgrade of Sibu Airport, infrastructure jobs in SCORE, other portions of the Inter State Water Transfer project and LRT extensions. More clarity on India road jobs will surface towards 4QCY10. With more than 12 years in the market, we expect IJM to be a prime beneficiary.

BUY, sector’s most defensive play. IJM’s diversified earnings base and strategy to bid for a large pool of contracts makes it the most defensive stock in the sector. Key catalysts are i) rollout of mega contracts, revival of private sector and India contracts; ii) sustainability of property sales at RM1.2bn and successful launch of Light Collection 1 at new benchmark price of RM800 psf. Light Linear and Light Point are 85% and 70% sold respectively; iii) high margin contracts for ICP. At 16x PE CY11F and P/NTA of 1.2x vs 1-SD historical averages of 18x and 1.3x respectively, we think there is room for further rerating.

Update on construction projects
IJM appears comfortable with its RM2bn order win guidance for FY11 vs our forecast of RM1.5bn. We believe this excludes potential India infrastructure jobs, more clarity on this towards end-2010. We expect a more formal government-togovernment agreement on road contracts to come to fruition by year end. Potential projects in the pipeline are the RM700m National Cancer Institute in Putrajaya, RM150m upgrade of Sibu Airport, more infrastructure jobs in SCORE, other portions of the Inter State Water Transfer project and  LRT extensions.

IJM is still vying for some mega contracts such as the LRT extensions and other portions of the Inter-State Water Transfer project. As the tenders for pumping station (c. RM200m), Kelau dam (c. RM300m) and piping works (c. RM200m) have closed, the market is still awaiting the official award of these contracts. There was recent newsflow that the Selangor State Government has stumbled upon a new water source which may derail the whole project. However, we understand that the final award has not been made due to certain approvals needed from Japan and should go ahead as planned. Except for the water treatment plant, Langat 2, this project is financed by Japan Bank International Cooperation.

As for the LRT extensions, IJM is one of 17 main contractors shortlisted out of 118. There were also 15 companies prequalified as nominated subcontractors for the fabrication and delivery of segmental box girders. We understand tenders will likely open by June 2010 while construction could kick off by end-2010. Syarikat Prasana Negara’s Group MD was quoted as saying that the final railway scheme has been submitted to the Department of Railways and is awaiting final approval from the government.

In our view, the potential winner would have a strong combination of expertise in this field, competitive pricing, strong balance sheet and the availability of casting yard to fabricate box girders. We understand box girders are more costly to fabricate and also harder to maintain because of the need for access to a confined space inside the box. Taking this into account, we think IJM is a strong contender with its ownership of Industrial Concrete Products.

All blue skies for IJM Land
IJM Corporation’s 62%-owned property arm, IJM Land is doing extremely well. It ended FYMar10 with property sales of RM1.2bn vs c. RM750m in FY09 and RM900m in FY08. Unbilled sales stand at RM800m and we understand the strength in the market is across all key states where it has a presence – Klang Valley, Penang and Sabah. Its flagship  project, ‘The Light” in Jelutong, Penang has done well so far.

 Initial launches Light Linear (average price RM430 psf) has been 85% sold while Light Point (average price RM620 psf) is now 70% sold. The next launch is the Light Collection series in May 2010 which will comprise 24 water villas with average built up area of 3,000 sq ft priced at RM800 psf and 152 low rise condominiums with average built up area of 1,000 sq ft priced at RM600 psf. Given the scarcity of land in Penang and the overall reflationary market, we expect strong take up which should instill more confidence in IJM Land crystallizing the RM5bn GDV Light development.

Still the most defensive exposure
In our view, the key argument for IJM is its resilient and diversified earnings base. While IJM is effectively a conglomerate with key businesses in construction, toll concessions, property, plantations and manufacturing, the market continues to value it as a construction stock. This is a win-win situation as its diversified nature provides for earnings resilience while its share price continues to move on positive newsflow leading up to the 10MP.

Also, its strategy to bid for a large pool of contracts gives it the highest probability for new wins. While IJM is a frontrunner to clinch most of the mega projects in the pipeline such as other portions of the Interstate Water Transfer Project and LRT extensions, we argue it is still less reliant on them.