IJM Corp Bhd (Nov 29, RM5.59)
Maintain sell with a lower target price of RM4.24 (from RM5.75): IJM Corp reported revenue of RM1.097 billion (up 6.2% quarter-on-quarter) and a profit after tax and minority interests (Patami) of RM74.8 million (-35% q-o-q) in 2QFY12 ended Sept 30.
The cumulative six-month 2012 Patami of RM189.8 million meets 42% of our earnings forecast and 40% of street’s estimate. Excluding the foreign exchange translation losses of RM32 million, core earnings are mostly in line.
The shortfall of earnings in 2QFY12 is due to: (i) lower recognition of construction revenue (mainly due to timing issues); and (ii) margin erosion in the property development division from 26% to 17% q-o-q as the bulk of the projects in Penang are in the early phases.
We expect a better set of results for FY12 after a lacklustre first half, with construction pre-tax margin to normalise to about 4% to 5% and better earnings contribution from the healthy unbilled sales in property development coupled with better margins.
Construction pretax margin fell marginally to 3.2% from 3.7% q-o-q, and we maintain our view that the construction margin for FY12 and FY13 will hover around 3% to 4% as most of the new orders are still in their early phases.
We expect margins to normalise to about 5% and see meaningful contribution from 2012 onwards.The management has highlighted that the West Coast Expressway’s (WCE) realignment issue has been resolved. However, construction will commence in late 2H12 and earnings recognition can only be seen in FY13. We understand that the New Pantai Expressway (NPE) extension may face some delays due to alignment issues, but management expects a resolution by 1H12. Therefore we believe the award will only come in late 2012 with earnings contribution impacting only in late 2013. IJM’s outstanding order book stands at RM3.8 billion, of which 85% are domestic jobs.
IJM’s management thinks there are still ample opportunities in the local construction scene with the MRT project the main focus. Recall that IJM Construction has been shortlisted for all three categories, civil works, stations and depots for the MRT elevated portion. The tender closed in October and management expects the contract to be awarded in 1Q12, with each package estimated to range between RM500 million and RM1 billion. Channel checks indicate that the margins for the MRT job range from 3% to 5%.
IJM’s management will focus more on mid-end products next year, especially its maiden launch of Canal City in Kota Kemuning, Selangor, (gross development value [GDV]: RM10 billion). Phase 1 with a GDV of RM250 million is slated to be launched in 2H12.
We sense that the management has turned cautiously optimistic on the property market, just like other developers. Other projects in the pipeline are Sebana Cove in Johor (GDV: RM1.4 billion) and a light commercial development in Penang (GDV: RM4 billion).
Its unbilled sales of RM1 billion should provide clear earnings visibility for the next two years.
The loss for the quarter was mainly due to the foreign exchange translation losses caused by offshore US dollar-denominated borrowings amounting to RM32 million. It was impacted by the adoption of International Financial Reporting Interpretations Committee (IFRIC) 12 by toll concessions amounting to a net loss of RM12 million.
IJM’s management views this as part of the operational pitfalls and remains confident that strong growth can be delivered going forward, especially from the expansion of berth capacity at Kuantan Port and Besraya Highway extension which will begins operation by 2013.
We are maintaining our earnings forecasts. The key risks are the timing of construction jobs, inflating raw material cost and take-up rates of property projects.
Maintain “sell” with a sum-of parts-based (SOP) target price of RM4.24, which implies a FY13 price earnings ratio (PER) of 13 times. This is premised on pegging PER to its construction earnings (from 16 times to IJM Corp’s mean PER of 15 times), lower fair values for IJM Plantation and IJM Land, plus a 10% discount on the total SOP value reflecting a high foreign shareholding risk.
The share price catalysts are news flow of contract awards from the Economic Transformation Programme-pushed projects such as the MRT project, approval of the WCE and NPE extensions, infrastructure projects in Iskandar/Sarawak and extension of existing port concessions. — UOBKayHian, Nov 29
This article appeared in The Edge Financial Daily, November 30, 2011.
Maintain sell with a lower target price of RM4.24 (from RM5.75): IJM Corp reported revenue of RM1.097 billion (up 6.2% quarter-on-quarter) and a profit after tax and minority interests (Patami) of RM74.8 million (-35% q-o-q) in 2QFY12 ended Sept 30.
The cumulative six-month 2012 Patami of RM189.8 million meets 42% of our earnings forecast and 40% of street’s estimate. Excluding the foreign exchange translation losses of RM32 million, core earnings are mostly in line.
The shortfall of earnings in 2QFY12 is due to: (i) lower recognition of construction revenue (mainly due to timing issues); and (ii) margin erosion in the property development division from 26% to 17% q-o-q as the bulk of the projects in Penang are in the early phases.
IJM’s management thinks there are still ample opportunities in the local construction scene.
We expect a better set of results for FY12 after a lacklustre first half, with construction pre-tax margin to normalise to about 4% to 5% and better earnings contribution from the healthy unbilled sales in property development coupled with better margins.
Construction pretax margin fell marginally to 3.2% from 3.7% q-o-q, and we maintain our view that the construction margin for FY12 and FY13 will hover around 3% to 4% as most of the new orders are still in their early phases.
We expect margins to normalise to about 5% and see meaningful contribution from 2012 onwards.The management has highlighted that the West Coast Expressway’s (WCE) realignment issue has been resolved. However, construction will commence in late 2H12 and earnings recognition can only be seen in FY13. We understand that the New Pantai Expressway (NPE) extension may face some delays due to alignment issues, but management expects a resolution by 1H12. Therefore we believe the award will only come in late 2012 with earnings contribution impacting only in late 2013. IJM’s outstanding order book stands at RM3.8 billion, of which 85% are domestic jobs.
IJM’s management thinks there are still ample opportunities in the local construction scene with the MRT project the main focus. Recall that IJM Construction has been shortlisted for all three categories, civil works, stations and depots for the MRT elevated portion. The tender closed in October and management expects the contract to be awarded in 1Q12, with each package estimated to range between RM500 million and RM1 billion. Channel checks indicate that the margins for the MRT job range from 3% to 5%.
IJM’s management will focus more on mid-end products next year, especially its maiden launch of Canal City in Kota Kemuning, Selangor, (gross development value [GDV]: RM10 billion). Phase 1 with a GDV of RM250 million is slated to be launched in 2H12.
We sense that the management has turned cautiously optimistic on the property market, just like other developers. Other projects in the pipeline are Sebana Cove in Johor (GDV: RM1.4 billion) and a light commercial development in Penang (GDV: RM4 billion).
Its unbilled sales of RM1 billion should provide clear earnings visibility for the next two years.
The loss for the quarter was mainly due to the foreign exchange translation losses caused by offshore US dollar-denominated borrowings amounting to RM32 million. It was impacted by the adoption of International Financial Reporting Interpretations Committee (IFRIC) 12 by toll concessions amounting to a net loss of RM12 million.
IJM’s management views this as part of the operational pitfalls and remains confident that strong growth can be delivered going forward, especially from the expansion of berth capacity at Kuantan Port and Besraya Highway extension which will begins operation by 2013.
We are maintaining our earnings forecasts. The key risks are the timing of construction jobs, inflating raw material cost and take-up rates of property projects.
Maintain “sell” with a sum-of parts-based (SOP) target price of RM4.24, which implies a FY13 price earnings ratio (PER) of 13 times. This is premised on pegging PER to its construction earnings (from 16 times to IJM Corp’s mean PER of 15 times), lower fair values for IJM Plantation and IJM Land, plus a 10% discount on the total SOP value reflecting a high foreign shareholding risk.
The share price catalysts are news flow of contract awards from the Economic Transformation Programme-pushed projects such as the MRT project, approval of the WCE and NPE extensions, infrastructure projects in Iskandar/Sarawak and extension of existing port concessions. — UOBKayHian, Nov 29
This article appeared in The Edge Financial Daily, November 30, 2011.
