• Maintain NEUTRAL and MYR1.59 TP, 1% upside. IJM Corp’s 1HFY23 (Mar) core earnings of MYR144.2m (>+50% YoY) met our, but missed Street estimates – accounting for 49% and 44% of full-year projections. Positives regarding the Mass Rapid Transit 3 (MRT3) wins have likely been priced in without any other big catalysts in sight. Hence, we think the stock is fairly valued. Our NEUTRAL call is also premised on its MYR4.8bn current orderbook – a far cry from the MYR9.4bn level seen at end-FY18.

• Performance review. IJM generated MYR1.1bn (+23% YoY) and MYR71.7m (+>50%YoY) in revenue and core profit during 2QFY23. On a segmental basis, PBT for the construction arm was higher by >100% YoY due to higher profit margin recognised upon the finalisation of accounts of recently completed projects. Meanwhile, the property segment recorded a PBT of MYR29.3m in 2QFY23 (2QFY22: loss before tax of MYR14.8m) due to higher work progress at its ongoing projects. Likewise, the industrial segment saw its PBT jump by more than 50% YoY due to higher delivery of piles and ready-mixed concrete, coupled with improved margin from better operating efficiency. In contrast, its infrastructure division saw a larger loss- before-tax of MYR16.6m in 2QFY23 (2QFY22 loss-before-tax: MYR8.8m) as Malaysia’s tollway traffic growth was negated by lower cargo throughput at the Kuantan Port amid higher freight charges and higher maintenance costs at overseas highways in India.

• Outlook. The group’s latest outstanding construction orderbook stood at MYR4.8bn (around three years’ visibility) after including the four latest job wins in FY23 worth MYR1.1bn (vs our replenishment target of MYR3bn). Moving forward, management guided to replenish the remainder of the new job target via the bids it has put for the MRT3 civil packages and a few highway projects in India. Nevertheless, current orderbook level is way below the MYR9.4bn level at end-FY18. Aside from that, the property development segment will be supported by unbilled sales of c.MYR3.1bn as at end-2QFY23.

• Earnings and valuation. No changes to our estimates as results met expectations. As such, our SOP-derived TP of MYR1.59 is maintained after ascribing a 0% ESG premium based on our in-house ESG methodology. We gathered that IJM has finalised the restructuring agreement with the Government for the Kajang-Seremban Highway (LEKAS) and Sungai Besi Highway Besraya pending final clearance while the New Pantai Expressway and West Coast Expressway are expected to take a few more months. Management guided that the toll restructuring will be net present value (NPV) neutral overall, but the quantum of reduction in annual earnings from the toll business (as it may likely involve an extension to the concession period following a toll rate reduction) has yet to be made known.

• Key downside risks include failure to secure contracts and a prolonged period of elevated material costs. The converse constitutes upside risks.

Source: RHB Research - 29 Nov 2022