By Sherilyn Goh
IJM Corp is expected to reward shareholders with a special dividend in 4Q16 as it recaps exceptional gains from the sale of its Indian highway concessions, while a strong construction order book is also expected to drive earnings going forward for the group. Could all of these sound too good to be true?
Business model: Listed on Bursa Malaysia’s Main Board, IJM Corp Bhd is one of Malaysia’s leading conglomerates with core business activities encompassing construction, property development, manufacturing and quarrying, infrastructure concessions, and plantations.
Founded in 1983, the name “IJM” is derived from the name of three different companies. “I” stands for IGB Construction Sdn Bhd which was incorporated in 1981, “J” stands for Jurutama Sdn Bhd which was incorporated in 1970, and “M” stands for Mudajaya Construction Sdn Bhd which was incorporated in 1965.
In April 2007, IJM acquired the Road Builder Group, its nearest competitor, to augment its position as one of the country’s biggest construction players. Its target markets are primarily in Malaysia, India, the United Arab Emirates, China, and Indonesia.
For the first quarter of financial year 2016 (1Q16) ended June 30, 2015, IJM Corp recorded a net profit of RM336.9 million which was a 26.1% increase year-on-year (y-o-y), despite its revenue falling by 13.9% y-o-y to RM1.18 billion in 1Q16.
The fall in revenue was attributed to its construction segment posting a 25.1% decline y-o-y, while its property and plantation segments declined by 40% and 20.3% respectively.
Most recently, IJM’s construction arm is involved in the expansion plans of the Kuantan Port, with orders from the port’s expansion works constituting 17% of its subsidiary’s outstanding order book.
Upon completion, both phases are expected to double the port’s capacity from the existing 26 million tonnes to 52 million tonnes yearly, the additional capacity needed to ensure sturdy growth within this division.
Furthermore, the port’s management is looking at putting forth a proposal to the Finance Ministry, to gazette part of the port’s area as free trade zones. Should the application be approved, foreign direct investments in those areas are expected to increase in tandem and hence, boosting throughput of the port over the longer term.
IJM Corp also realised an RM169 million exceptional gain from the completion of a sale for the 74% stake in Jaipur-Mahua Tollway to ISQ Asia in 1Q16. There are also the disposal of stakes in several other Indian highway concessions pending completion between end-financial year 2016 (FY16) and FY17.
Shareholders and management: According to the group’s annual report for the financial year 2015, its major shareholders include the Employees Provident Fund (13.1%), AmanahRaya Trustees Bhd (8%), and Lembaga Tabung Haji (5.28%).
The management of IJM Corp is helmed by 56-year-old Soam Heng Choon, who is the group’s chief executive officer (CEO) and managing director. He took over the baton from his predecessor, 60-year-old Teh Kean Ming, effective April 6, 2015.
Prior to his appointment, Soam has started his career with IJM Corp since 1989, and was appointed as deputy CEO and deputy managing director on June 7, 2013.
The group’s construction division is headed by 50-year-old Liew Hau Seng. He was previously the executive director of IJM Corp from June 1, 2012 to April 5, 2015, and was appointed to head the construction division effective June 7, 2013.
Share price performance: IJM Corp closed on Sept 17 at RM3.40 per share, up 9 sen.
The stock is trading at its one-month high and is seen to be going on uptrend, after hitting its 52-week low of RM3 on Sept 8.
Earlier in May, IJM rewarded shareholders with a one-for-one bonus issue when it announced its financial results for the financial year ended March 31, 2015.
The increase in capital base – following the bonus issue of up to 1.793 billion new shares to be distributed to entitled shareholders – is said to better reflect the group’s current and future scale of operations, while the group expects the bonus issue to be completed by the third quarter of calendar year 2015.
What analysts think: IJM Corp’s 60%-owned Kuantan Port is expected to boost earnings for the construction and property conglomerate, with planned expansion and a potential rezoning of the port into a free trade zone area driving both near and middle/long-term earnings respectively, according to research house UOB Kay Hian (UOBKH).
“We recently hosted analysts and fund managers at IJM’s 60%-owned Kuantan Port, which largely carries dry-bulk cargos.
“Our findings include the port will continue to further anchor IJM’s earnings outlook this year, phase one of the port expansion is on track for completion by early 2017 with phase two set to kick off thereafter, and (that) the port is submitting proposals for phases of the port to be designated as free trade zones, which would further boost its longer-term growth prospects,” said UOBKH in its report published on Sept 17.
Affin Hwang Capital, on the other hand, is expecting the group to reward shareholders with a special dividend in 4Q15 as it reaps exceptional gain from the sale of its Indian highway concessions.
“We estimate additional exceptional gains totalling RM371 million will be reaped in FY16-17 from the further sales of Indian highway concession stakes and the 32.76 acre land at The Light Waterfront,” noted Affin Hwang Capital in its research report dated Sept 10.
The group is also set to benefit from the weaker ringgit against the Indian rupee, as it is expected realise foreign-exchange gain when it repatriates the cash proceeds from the Indian highway disposals. Affin Hwang Capital is estimating cash proceeds of RM1.18 billion at the current exchange rate.
“We lift our net profit forecasts by 19-31% for FY16-17 to reflect exceptional gains after tax of RM431 million in FY16 and RM140 million in FY17. But we cut our earnings per share forecasts by 35-50% for FY16-18 to adjust for the one-for-one bonus issue.
“We reduce our revised net asset value-based target price to RM3.76 from RM7.88 to reflect the bonus issue and higher company net debt as at end-FY15, which was disclosed in the latest annual report,” said Affin Hwang Capital.
The research house is maintaining its “buy” call, as current price-earnings (PE) of 11-13 times for FY16-17 estimates (FY16-17E) are deemed attractive.
UOBKH is also reiterating its “buy” call on IJM Corp, with an adjusted sum-of-the-parts-based target price of RM3.95 at a forecast FY17 (FY17F) PE of 16.4 times, down from RM7.90 previously, after taking into account the recently completed one-for-one bonus issue.
“We believe that its multi-year construction projects (West Coast Expressway, or WCE, and Kuantan Port Extension) coupled with its strategic property land banks and concession assets would continue to grow shareholders’ value in the long run.
“The stock currently trades at 12 times FY17F PE, at the lower end of its 10-year historical range of 14.6 times. We continue to like IJM Corp for its strong construction order book as well as a portfolio of infrastructure assets that would be able to provide the company with stable recurring income and cash flows,” UOBKH said.
Earnings forecast:
Peer comparison:
StockStalk: IJM’s record construction order book of RM7 billion as at end 1Q16 is equivalent to 7.4 times construction revenue in FY15, which should sustain construction activities over the course of the next four to five years, thus providing good earnings visibility for its construction arm going forward.
Noteworthy is also the strong pipeline of potential new projects that IJM can bid for, including the additional works for the WCE project worth RM2.2 billion, Klang Valley Mass Rapid Transit Line 2’s above-ground works worth RM16 billion, and Light Rail Transit Line 3 costing RM9 billion.
Tenders for these projects are understood to be called latest by end-2015 or early 2016, while IJM is also believed to boast competitive advantage due to its strong track record in undertaking rail-based projects, being the project manager for the entire WCE project.
While the IJM Group’s property arm saw slower sales with RM300 million chalked up in 1Q16, with the group reducing its target sales to RM1.5 billion for FY16 from RM1.8 billion previously, the exceptional gains from its asset disposals are expected to support earnings pending the pickup in property earnings, though yet to be recognised.
According to Affin Hwang Capital, it is a strategic move for the group to monetise its mature infrastructure assets and land bank through the forming of joint ventures. Aside from the Jaipur-Mahua Tollway disposal, IJM Corp also expect to derive cash proceeds from other asset disposals including the sale of 70% Swarna Tollway to MAIF Investment pending completion by end-FY16, among others.
IJM’s core calendar year 2016 estimates PE ratio of 17.3 times is in line with the average sector PE for Asean construction and infrastructure. Given that IJM is also the largest market cap stock among Asean peers with a net yield of 4.2% in FY16E, this may be a good time for investors to pick up the stock while it trades below fair value.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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