• Maintain NEUTRAL, new MYR1.59 TP from MYR1.81, 3% upside with 3% FY23F (Mar) yield. IJM Corp secured its first batch of contracts in FY23F, for the construction of a hospital in Kapar and an office tower for the Inland Revenue Board (LHDN) in Shah Alam worth MYR831m and MYR150.8m. The former is expected to be completed within 48 months ie by Nov 2026, while the latter is slated for completion by Oct 2025. While these job wins are timely, it is still lower than its outstanding orderbook level of MYR7.8bn as at end-FY19.

• Contract details. The total contract value of the 312-bed government hospital in Kapar that is attributable to IJM is MYR499m, after factoring in the 60:40 JV with Ganda Imbuhan. We gathered that PBT margins for both the Kapar hospital and LHDN tower could be in the range of 6-9%. The total contract wins of MYR649.4m are within our FY23F replenishment assumption of MYR3bn.

• Our view. In light of the Parliament’s dissolution, we do not discount the possibility of a delay for Mass RapidTransit 3 main civil work packages, from 4Q22 to 1Q23. Heightened political uncertainty post-election in the form of a hung parliament could exacerbate the deferment of the rollout of such projects. We deem the latest job wins as timely, since IJM’s outstanding construction orderbook stood at MYR3.9bn as at end June (without any new job wins since the start of FY23). That said, these contracts will take the value of its construction orderbook to MYR4.6bn – vs the MYR6.1bn recorded as at end-Jun 2019 – suggesting a low orderbook level.

• Update on toll concession restructuring. Based on news reports, the caretaker government has announced lower toll rates for IJM’s Sungai Besi Expressway (BESRAYA) and Lebuhraya Kajang-Seremban (LEKAS) effective from 1 Jan 2023. We gathered from management that the basis of the toll reduction is in line with the toll concession restructuring that is ongoing. There is a dearth of disclosed details, but we believe that the restructuring will involve an extension of the toll concession period for BESRAYA (current expiry date: 2040), LEKAS (current expiry date: 2039) and New Pantai Expressway (NPE) (current expiry date: 2030) highways under the first phase. IJM’s intention to remain in the highway business is underpinned by the prospects of it leveraging on extension works contracts.

• We make no change to our estimates, as the latest job wins are within our job replenishment assumptions. Nevertheless, we ascribe a higher holding company discount of 30% (from 20%) in our SOP valuation, to take into account the possible risks of a sluggish orderbook replenishment rate. As a result, our SOP-derived TP drops to MYR1.59 from MYR1.81, after ascribing a 0% ESG premium based on our in-house ESG methodology.

• Key downside risks include failure to secure new contracts and a prolonged period of elevated high material costs. The opposite of these circumstances would present upside risks.

Source: RHB Research - 19 Oct 2022