WCE to benefit four IJM divisions

IJM Corp Bhd
(Sept 23, RM5.75)
Maintain buy at RM4.70 with a higher target price of RM7.20 (from RM6.60): We are switching our top pick to IJM from Gamuda. The timing of the award of the West Coast Expressway (WCE) will be sooner (around 1Q14) than the MRT Line 2 (2Q15).

With the current headwinds surrounding our government debt and budget deficit, there are also concerns that there could be some delay in the MRT Line 2. The concession agreement for WCE has already been signed and the next milestone is achieving financial close in October. Also, the contract value of about RM5 billion is just 20% of the MRT Line 2 and is largely privately funded.

Besides the WCE, IJM has other projects, such as the Kuantan Port extension (Phase 1 worth RM1.5 billion to RM2 billion), KL Monorail extension (RM3 billion, jointly bidding with Scomi Engineering) and other internal jobs from its property arm, IJM Land.

WCE is expected to benefit four of IJM’s divisions — construction, property, manufacturing and concession. IJM now has a 38.2% effective stake in West Coast Expressway Sdn Bhd, including 22.7% equity interest in Kumpulan Europlus. For construction, the WCE will more than double its RM2.5 billion order book as IJM’s expected portion of the infrastructure works is between RM3 billion and RM4 billion, while also complements its manufacturing division (under industrial concrete products), where demand for its concrete piles will rise.

WCE could also be a precursor to the listing of its other local toll concessions (95 sen per share of sum of parts, assuming a free cash flow yield of 8% to 9%). We think this is conservative as PLUS Expressways was taken private at a free cash flow yield of less than 8% where traffic volume growth is more sensitive to fuel price hikes. We have also not factored in the extension of Besraya, WCE and Lekas. There could also be the opportunistic sale of its Indian toll concessions similar to Trichy at two times book value.

The market is assigning zero value to IJM’s construction business after stripping out the market value of IJM Land and IJM Plantations, and the net asset value of other businesses from our sum-of-parts (SOP). This is not justified given the scarcity of large scale contractors with strong execution track record and corporate governance. We raise our target price to RM7.20 (based on SOP) after adjusting for the sale of Kemaman Port, valuing its 10% stake in Scomi at market value and imputing higher valuation for the industry division. — HwangDBS Vickers Research, Sept 23

This article first appeared in The Edge Financial Daily, on September 24, 2013.