We maintain HOLD on IJM Corp (IJM) with a higher SOP-based fair value (FV) of RM1.87/share (from RM1.71/share), which implies an FY23F PE of 16x. There is no FV adjustment for ESG based on our 3-star rating.
IJM’s FY21 core net profit of RM201mil (adjusted for exceptional items, mainly net allowance for impairment of assets), was within our expectation but below street’s, coming in 5% below our forecast and 29% below consensus estimates.
We are raising our FY23F earnings by 32% and FY24F by 34% to reflect stronger contributions from IJM’s construction, manufacturing & quarrying, and infrastructure divisions.
IJM declared a final dividend of 4 sen/share, bringing total FY22 DPS to 21 sen/share. This translates to an impressive dividend yield of 11.7%. Nonetheless, we do not expect this to be recurring as the higher DPS was due to a special dividend of 15 sen/share from the disposal of IJM Plantation. We maintain FY23–25F DPS at 6 sen/share, translating to a decent dividend yield of 3.3%.
IJM’s FY22 core net profit fell 31% YoY mainly due to poorer performance of its operating segments:
The construction segment’s PBT fell 12% to RM122mil due lower construction activities as a result of lockdowns and higher share of losses from 46%-owned Singapore-based Hexacon Construction.
The property segment’s PBT slid 8% to RM165mil (after excluding the impairment of inventories pertaining to the industrial development in Kuantan [MCKIP] of RM66mil) mainly due to unrealised FX losses of RM14mil.
The manufacturing & quarrying division turned around to a PBT of 69mil (after excluding the one-off disposal gain of RM79mil in FY21) from an LBT of RM10mil on higher deliveries of pile, quarry products, and ready-mix concrete.
Excluding a one-off impairment of its toll concessions assets of RM77mil (split evenly between Vijayawada and Lekas), the infrastructure segment’s PBT dropped 16% to RM99mil due to higher major maintenance cost and unrealised FX losses.
Meanwhile. IJM’s 4QFY22 core net profit (after adjusting for oneoff items, mainly impairment of inventories and toll concession assets as well as unrealised FX loss) rose 48% QoQ to RM128mil from 3QFY22 due to better contribution from its construction division arising from the finalisation of accounts of certain JV projects.
During the briefing last Friday, IJM guided an order book replenishment of RM3bil for FY23F. For FY22, it secured new orders of RM1.7bil (higher than our estimation of RM1.5bil), bringing its outstanding order book to RM4.3bil (2.8x FY22 construction revenue). Notable job wins in FY22 include Jendela Residences (RM383mil), WCE, Beruas– Taiping South (RM261), substructure works for Sg Pahang Bridge, the ECRL (RM258mil), The ERA @ Duta North (RM242mil) and Mezzo Residential Tower (RM238mil). We echo management’s view as our order book replenishment assumption is RM3bil in FY23–25F. Potential replenishments include CMC301 or CMC302 of the MRT3 and the ECRL near Kuantan Port, and hospital projects. We also foresee replenishments from its toll roads should the toll restructuring materialise as it entails an extension of one of the highways.
On the MRT, tenders for civil contractor packages opened last Friday. We revise our previous estimates for CMC301 to RM2.1bil (6km elevated and depot), CMC302 to RM9.7bil (28km elevated, 1km underground and depot), and CMC303 to RM14.6bil (6km elevated and 10km underground). We expect more details to be announced soon. Barring any delay, we expect these packages to be awarded in 4QCY22. Given that the packages would require minimum financing for the initial 2 years, we believe IJM is a strong contender due to its healthy balance sheet and existing track record.
Management revealed that the higher cost of building materials has already been priced in for its new projects, whereas certain older projects have a cost pass-through arrangement. We expect costs to remain elevated given the prolonged Ukraine-Russia war, hence we have pencilled in a thinner EBITDA margin by 1.5% for its existing projects.
IJM’s property development segment saw record level of local property sales at RM2.5bil (vs. RM1.7bil in FY21 and RM1.4bil in FY20) mainly from the central region (66%) whereas its inventory levels were reduced to RM800mil from RM1.2bil. IJM targets RM1.8bil in FY23F supported by RM1.4bil–RM1.5bil of new launches. However, we are targeting RM1.5bil as we believe that the sentiment is weak due to potential hikes in Malaysia’s interest rate. On the ongoing asset monetisation efforts, IJM expects to be able to monetise RM600mil from sale of land in London, MCKIP and Penang, which we expect will be completed in FY23–FY24F.
The manufacturing and quarrying division secured 2.2mil tonnes of orders in FY22 (vs 1.3mil in FY21), bringing the current outstanding order book to above 1mil tonnes. Management noted that this division is not affected by rising costs as it is able to pass through the escalation in prices. We expect this division to be sustainable given its strong order book replenishment.
Meanwhile, IJM’s toll roads are seeing a recovery to pre-MCO levels. As revealed during the previous briefing, the government approached IJM to restructure its toll concessions (NPE, BESRAYA, and LEKAS). IJM indicated that it intends to continue and grow the toll business. Discussions are now at the tail end and IJM is currently awaiting the final decision from the government.
Despite achieving a lower throughput of 22.7mil in FY22, we expect Kuantan Port’s FY23F throughput to hit 27mil on the back of increased manufacturing activities following the resumption of economic activities after Covid-19 lockdowns. IJM is also finalising additional investors with combined investments of RM14bil into MCKIP 1 and 2 which would contribute more than 10mil tonnes of additional cargo throughput for Kuantan Port in 2024–2025.
Challenges faced by IJM include: (i) rising building material costs led by an escalation/prolonged Ukraine-Russia war; and (ii) delays or shelving of mega projects.
