IJM Corp Bhd (Feb 14, RM5.95)
Maintain buy with unchanged sum-of-parts-derived fair value of RM7.23 per share: In this report, we examine three possible funding scenarios for the West Coast Expressway (WCE).
A key focus of the WCE is on its funding requirements after IJM’s 23%-owned associate Kumpulan Europlus (KEuro) received approval-in-principle to privatise the highway via the latter’s 64%-owned unit West Coast Expressway Sdn Bhd just last month.
Assuming a debt/equity ratio of 70:30, we estimate that the equity portion for the WCE may reach RM2 billion.
Its equity needs may appear huge compared to KEuro’s market capitalisation of only about RM669 million.
Furthermore, KEuro remains relatively highly leveraged with a net gearing ratio of around 1.1 times as at Oct 31 last year compared with 3.4 times a year ago.
By extension, this has given rise to market postulation of the potential involvement of other parties to help bridge the funding gap of WCE, including IJM.
Three possible financing scenarios are: (i) IJM increases its current stake of 23% in KEuro; (ii) IJM owns a direct stake in the highway itself; and (iii) the entry of select cornerstone investors in the project, including government-related entities.
In our view, scenario one is unlikely to materialise as such a move would likely trigger a general offer on KEuro and may undermine IJM’s balance sheet if the former’s debts are subsequently consolidated at IJM group level.
We believe option two and/or three could emerge as realistic choices. Under the first, IJM would help lend credence to the WCE and further solidify its bid for up to RM7 billion worth of associated construction works without the need to consolidate KEuro into its books.
The presence of strategic government-backed investors under scenario three would help plug the funding gap, possibly through the balance 36% share of WCE Sdn Bhd, where the identity of the stakeholder remains unknown at this juncture.
We expect the formalisation of a concession agreement for the WCE in a matter of weeks to boost IJM’s rising order book prospects, where the highway could present over RM4 billion of job opportunities to underpin the group’s RM8 billion to RM9 billion new contract target in 2012.
We also like IJM for its diversified earnings base. IJM Plantations (28% of FY12F group earnings) is on track to double its Indonesian plantation landbank to 40,000ha in three years. — AmResearch, Feb 14
This article appeared in The Edge Financial Daily, February 15, 2012.
Maintain buy with unchanged sum-of-parts-derived fair value of RM7.23 per share: In this report, we examine three possible funding scenarios for the West Coast Expressway (WCE).
A key focus of the WCE is on its funding requirements after IJM’s 23%-owned associate Kumpulan Europlus (KEuro) received approval-in-principle to privatise the highway via the latter’s 64%-owned unit West Coast Expressway Sdn Bhd just last month.
Assuming a debt/equity ratio of 70:30, we estimate that the equity portion for the WCE may reach RM2 billion.
Its equity needs may appear huge compared to KEuro’s market capitalisation of only about RM669 million.
Furthermore, KEuro remains relatively highly leveraged with a net gearing ratio of around 1.1 times as at Oct 31 last year compared with 3.4 times a year ago.
By extension, this has given rise to market postulation of the potential involvement of other parties to help bridge the funding gap of WCE, including IJM.
Three possible financing scenarios are: (i) IJM increases its current stake of 23% in KEuro; (ii) IJM owns a direct stake in the highway itself; and (iii) the entry of select cornerstone investors in the project, including government-related entities.
In our view, scenario one is unlikely to materialise as such a move would likely trigger a general offer on KEuro and may undermine IJM’s balance sheet if the former’s debts are subsequently consolidated at IJM group level.
We believe option two and/or three could emerge as realistic choices. Under the first, IJM would help lend credence to the WCE and further solidify its bid for up to RM7 billion worth of associated construction works without the need to consolidate KEuro into its books.
The presence of strategic government-backed investors under scenario three would help plug the funding gap, possibly through the balance 36% share of WCE Sdn Bhd, where the identity of the stakeholder remains unknown at this juncture.
We expect the formalisation of a concession agreement for the WCE in a matter of weeks to boost IJM’s rising order book prospects, where the highway could present over RM4 billion of job opportunities to underpin the group’s RM8 billion to RM9 billion new contract target in 2012.
We also like IJM for its diversified earnings base. IJM Plantations (28% of FY12F group earnings) is on track to double its Indonesian plantation landbank to 40,000ha in three years. — AmResearch, Feb 14
This article appeared in The Edge Financial Daily, February 15, 2012.
