IJM Corporation - Valuations have bottomed Buy

- Maintain BUY on IJM Corp, with a lower fair value of RM6.49/share (-5%) – based on the sum-of-parts method. This is to account for:- (i) muted work progress in India; (ii) shift in timing of the anticipated roll-out of the West Coast Expressway (WCE) works to FY14F (earlier: end 1QFY13F); and (iii) surge in IJM Land’s pre-sales. 

- IJM’s share price has shed 11% YTD and underperformed the FBM KLCI 30 index by 11%. We reckon that its share price overhang has largely been due to delays in the rollout of WCE and more recently, cancellation of the New Pantai Expressway Extension [although the latter does not form part of our new order book expectations].   

- But, we believe IJM’s valuations have bottomed at current levels. The stock is now trading at trough core FD FY13F-15F PEs of only 10x-14x (-1SD: 12x).

- Furthermore, the market may react positively to renewed hopes of the RM7bil-WCE finally taking off. This follows comments by Kumpulan Europlus (80% stakeholder for the WCE concession; balance 20% - IJM) just two days ago indicating that negotiations on the project are at the final stages with a formal concession agreement to be signed within two months. 

- If true, the deal would pave the way for construction works to be kick-started by mid-2013, with tenders opening in 1Q13. This in turn, could present IJM with ~RM5bil of job opportunities and potentially push its outstanding order book to a record RM9bil from ~RM4.1bil currently. 

- IJM’s order book prospects are perking-up moving into 2H12. Within the last two months, IJM has bagged two jobs – KTMB maintenance depot (RM119mil) and station works for the Sg.Buloh-Kajang MRT project (RM229mil) – bumping up total new wins secured YTD to ~RM1.3bil.

- We have conservatively assumed a more meaningful recovery for IJM’s margins to only actualise in FY15F (5.2%) vs. 3.8% each for FY13F-14F – as more local contracts dominate its order book mix. The legacy Indian jobs – while slow-moving (~40%+ completion) – only account for circa 12% of its outstanding jobs.      

- We project FY14F core net profit to rebound by a stronger 22% to RM566mil (FY13F: 10%). This would be mainly underpinned by:- (i) more robust property billings that is anchored by Bandar Rimbayu (FY14F: pre-sales RM3.3bil vs. RM2.5bil for FY13F); (ii) Maturing plantation landbank in Indonesia, with its maiden CPO mill in Kalimantan slated to be commissioned in 2HFY13; and (iii) additional capacity from Kuantan Port via a 600m berth expansion).  

Source: AmeSecurities