• We are maintaining our BUY rating on both IJM Corp Bhd and IJM Land Bhd with unchanged fair values of RM7.52/share and RM3.88/share, respectively.
• IJM Land was sold down (pre-suspension share price of RM2.86) this morning prior to the announcement that the proposed merger with MRCB had been aborted.
• Nonetheless, we are unfazed. It should be noted that IJM Land itself would be better off without going through the merger with MRCB because its valuations would otherwise be severely diluted by the injection of low-yielding assets from MRCB into the enlarged company.
• Consider this: IJM Land trades at a forward PE of 11x, and a steep 34% discount to our fully-diluted NAV of RM4.31/share. And, it is growing its earnings by a robust CAGR of 50% over FY11F-FY13F. In contrast, MRCB's earnings story lacks conviction as it is already trading at a steep forward consensus multiple of 36x and at only a 15% discount to our NAV of RM2.41/share.
• We cannot see how the enlarged property entity would offer compelling earnings as well as a valuation story in the near term, without the transfer of low-yielding assets out of the enlarged entity. The latter exercise was to have taken place post-merger.
• The issue now is the relative investment merits of IJM Corp and IJM Land.
• In our opinion, IJM Land's investment thesis is intact. The focus would again gravitate back to its strong fundamentals, deep value and astute management. We remain a BUYer of IJM Land particularly if its share price were to retrace back to the RM2.70-RM2.75 levels (see share price chart), before the announcement of the merger proposal on 23 November 2010.
• Admittedly, the call on parent IJM Corp is a little tricky. In our recent report, we had argued that an IJM Land-MRCB union would propel IJM Corp to be a front-runner in several exciting infrastructure and property development projects, including the massive redevelopment of the prized Sungai Buloh land under the EPF's mandate.
EPF STILL THE SINGLE LARGEST IN IJM CORP
On the surface, the termination of the proposed merger may not be good for IJM Corp as its perceived front-running role in EPF-led infrastructure and property developments may not be as strong. But, this does not mean that IJM Corp will lose out. It should be noted that EPF is still the single largest shareholder in IJM Corp with a 16% stake, followed by PNB at 9%.
Furthermore, IJM Corp’s execution and delivery track record as a contractor, particularly for Grade A buildings, is impeccable. The recent award of the Platinum Park building job worth RM431m is a good case in point. We believe that there are other strong enough share price catalysts underpinning IJM Corp’s share price going into 2011, namely:
1. The 'large' highway jobs in India. This follows the recent G-to-G signing between the Malaysian government and its Indian counterpart to render support for infrastructure works in India where IJM Corp has a significant physical presence and a long operating history.
2. The roll-out of six highways including the West-Coast Expressway earmarked under the government’s Economic Transformation Programme.
3. Potential balance sheet re-rating from the listing of its infrastructure assets.
4. Strong earnings growth from its port operations at Kemaman and Kuantan ports.
5. The bottoming of its construction margins from the completion of legacy jobs in FY11F. We forecast margin to more than double from 2.2% in FY10 to 5.1% in FY11F and expanding further to 8.3% in FY13F.
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