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IJM Corp (OSK Research) trading buy; target price RM6.31.

Merger in Motion

IJM reported 1HFY10 earnings of RM209m (+52% y-o-y), which were above our expectations. Construction margins continue to recover albeit at a slow pace. Management is positive on its orderbook outlook. We raise our FY11-13 earnings by 6%-7% and upgrade IJM to TRADING BUY from Neutral with a new RM6.31 TP which factors in our raised TP for IJM Plantations and the implied merger price of IJM Land. In our view, the IJM Land-MRCB merger could prove to be an indirect catalyst for IJM’s share price.

Above expectations. IJM’s 2QFY11 results displayed revenue of RM785.5m (-25.1% y-o-y, -20.3% q-o-q) and earnings of RM119.3m (+77.9% y-o-y, +32.5% q-o-q). On a cumulative basis, earnings summed to RM209.3m (+51.8% y-o-y). Margins over the similar horizon were higher with EBIT and net figures at 24.9% and 11.8% (vs FY10 comparatives of 15.3% and 6.2%). Summing it up, annualized earnings beat our estimates by 6.2% but were within consensus (+3.8%).

Construction recovers slowly. Although there was not much movement in profits at the construction division, margins continued to expand slowly. Construction PBT margins stood at 3.2% vs 2.9% in the last quarter. Although there are no longer any legacy jobs in its orderbook, the newer higher margin jobs have yet to significantly provide a margin boost. Management feels that it may take another 3-4 quarters before margins fully recover.

Positive on getting more jobs. Thus far into FY11, IJM has secured RM873m worth of new jobs vs our target of RM1.5bn. Its orderbook now stands at RM3.6bn and management is hinting of more job wins by year-end. IJM has tendered for over RM10bn worth of jobs and expects a significant orderbook enhancement next year. On the West Coast Expressway, management said it is still in talks with the Government on its implementation.

Other divisions. The property division has unbilled sales of ~RM900m and will launch another RM500m for the remainder of FY11. The take up rates have been good, averaging 70%. As for the industries segment, the swing of product mix to smaller piles led to a fall in average prices realized. Management is guiding for this segment to perform a little worse than last year, while the infra division continues to remain stable.

Upgrade to TRADING BUY. We increase our FY11-13 earnings estimates by 6%-7% as our plantation analyst has raised his earnings for IJM Plantations (NEUTRAL, TP: RM3.01). As for our SOP-based TP, we make the following changes: (i) value its stake in IJM Land based on the implied merger price of RM3.65, and (ii) value IJM Plantations at our newly upgraded TP. This raises our TP from RM5.55 to RM6.31. We upgrade IJM to TRADING BUY as the IJM Land-MRCB merger should be an indirect catalyst to IJM’s share price.

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Merger in the works. Yesterday, IJM Land (Not Rated) and MRCB (NEUTRAL, TP: RM2.30) announced that they have entered into an MOU for the proposed merger of the 2 entities. As the proposal is still at the MOU stage, much of the details on the merger were not disclosed at yesterday’s briefing. A detailed proposal of the merger is expected to be out within the next 3 weeks.

Share exchange and cash. The general concept is that a new company (“Newco”) will be formed as a listed entity on Bursa. Shares of both IJM Land and MRCB will be exchanged for shares in the Newco. The exchange will be based on RM3.65/ IJM Land share and RM2.30/ MRCB share, which translate into a P/BV of 2.48x for IJM Land and 2.61x for MRCB. Management highlights that besides a share exchange, the merger will also involve a cash repayment but did not elaborate on the exact proportion.

Merger benefits. The combined entity will have an estimated market capitalization of RM7bn, net assets of RM3bn and a landbank of 9000 acres. In our view the most obvious merger benefits between the 2 entities are the differences in their developments, which are at the same time complementary. IJM Land is centered on townships and residential developments while MRCB’s focus is commercial in nature. The merger will form a more diverse developer in terms of product offering. IJM Land also intends to tap on MRCB’s commercial development expertise for the commercial portion of The Light in Penang.

Pure property play. Management highlighted that the ultimate objective of Newco in the longer term is to be a full-fledged property play. This means that the construction and concession business from MRCB may need to be disposed of once the merged entity takes shape. We do not discount the possibility of IJM Corp buying up some of the construction and concession divisions of Newco. Management also highlights that the results of Newco are likely to be fully consolidated into IJM Corp’s accounts. This implies that: (i) Newco will be a subsidiary of IJM Corp, or (ii) Newco will be controlled by IJM Corp even if its stake is < 50%, thus allowing for consolidation.

No changes for now. Pending more clarity on the merger, we leave our earnings estimates unchanged for now. As for our SOP based TP, we are valuing IJM Corp’s stake in IJM Land based on the RM3.65 merger price.


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