OSK: Upgrades IJM to ‘buy’

Riding on recovery

We are turning bullish on IJM following our recent meeting with management. Tenders have been on the rise and construction margins are expected to recover in FY2011. IJM also stands to be a key winner of more road jobs in India. Other than that, its industries and property divisions are expected to remain strong. We raise our FY2011-12 earnings by 5%-8%. Upgrade to BUY, RM5.45 TP.

Tenders pick up. IJM’s orderbook balance currently stands at ~RM4.2 billion (RM3.6 billion excluding the stalled IT Tower in Pakistan). Management said it experienced an increase in tenders during the 4Q2009-1Q2010 period, with tenders totalling RM4 billion. At the “point of tender”, PBT margin estimates stood at 6%-8%. Note that the sum tendered excludes jobs being directly negotiated or those for which IJM has been approached by potential clients. We assume a total RM2 billion in new jobs for FY2011-12 (RM1.49 billion in FY2010).

Margins recover. Construction margins have remained suppressed since 2QFY2009 due to: (i) outstanding “legacy jobs” in India, and (ii) newly secured jobs that have yet to go into full swing (no profits are recognised until completion hits 10%). We expect construction margins to remain at current levels until 1QFY2011 before making a more meaningful recovery. This is rather in line with management’s guidance that construction margins will only revert to normalised levels in FY2012.

More from India. India intends to construct 53,639km of roads in seven phases from now up to 2012. Some US$20 billion (RM63.89 billion) worth of road jobs are expected to be awarded by 1H2010. We understand that Malaysia’s CIDB is in negotiations with the National Highway Authority of India (NHAI). Under this framework, NHAI will allocate some of the road projects to CIDB, which will then decide how to award them to Malaysian contractors. Having completed 1,406 km of roads in India, we see IJM as a clear beneficiary.

China potential. We continue to see strong contributions from its industries division, with a potential surprise from 82%- owned ICP Jiangmen, which has a monthly capacity of 20,000 tonnes and is ~50% utilised. Higher orders could potentially be driven by: (i) implementation of the Hong Kong-Macau-Zhuhai Bridge, and (ii) expansion of ports in Guangdong province. We gather that there is potential for ICP Jiangmen to double capacity.

Strong property sales. Management expects properties to be the “star performer” in FY11. For the 9MFY10 period, sales totalled RM970 million, with RM800 million unbilled. Its Light Linear and Light Point developments in Penang (RM320 million collective GDV) are now 70%-85% sold. As The Light development commands higher margins (>20% PBT), we see its blended property margins being lifted in FY2011 as works have commenced.

Valuation & recommendation

Earnings adjustments. We raise our FY2011 earnings forecasts by 5.4% and that for FY2012 by 8.1% (FY2010 unchanged), which incorporates a construction margins recovery and stronger property revenue recognition. Besides the earnings adjustments, we are making the following changes to our Sum of Parts (SOP) valuation:

* Cut our construction earnings multiplier from 15x to 14x in line with the sector average

* Raise our industries earnings multiplier from 9x to 10x given the strong performance

* Mark to market its stake in listed entities, mainly IJM Land (NR)

* Remove our 10% discount to SOP valuation

Upgrade to BUY. Our RM5.45 TP implies 18.3x FY2011 earnings, representing ~1 standard deviation above its historical mean PER. We think such bullish parameters are achievable given IJM’s (i) construction margin recovery, (ii) news flow arising from more project awards, and (iii) sizable pool of concession assets.


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