IJM Corporation - Worth a second look

We are upgrading our recommendation on IJM from a MARKET PERFORM to an OUTPERFORM with a slightly higher (+3%) adjusted Target Price of RM5.74 based on SOP valuation. Our upgrade is mainly premised on our in-house upgrade of IJMLand’s Target Price coupled with its still ample upside (+12%) from the current share price. Following the recent news on the Selangor water issues, we understand that IJM’s JV project for Pahang Selangor Water Transfer Project (PSWT) is currently progressing well at above a 50 completion rate with the project financing with Japan Bank for International Cooperation (“JBIC”) still intact. The management is in discussion with the government to revive the NPE extension project with a new alignment, although the outcome is not likely to be decided in the near term. Its associate, Kumpulan  Europlus  (KEURO,  NOT  RATED)  is  expected  to  make  the announcement on the finalisation of the West Coast Expressway (“WCE”) concession the near term. There are no material changes in our forecasts at this juncture, but we have increased our TP higher from RM5.56 to RM5.74 (+3%) following our upward revision on IJMLand’s RNAV for its property project in UK.           

Business as usual for PSWT tunnelling project.  We understand that there are concerns on the funding of the on-going PSWT project due to the fiasco in the Selangor water industry. To recap, a consortium led by Shimizu was  awarded a RM1.3b tunnelling (45km) contract for the PSWT project at the Pahang site. IJM holds a 20 stake in the consortium together with UEM Builders (20), Nishimatsu (30) and Shimizu (30). The project is slated for completion by late 2014 and management reiterated that JBIC is still financing the project.          

NEP extension project under review. We understand that management is currently meeting with the government to refresh the alignment of the proposed NPE highway extension project. In our view, this could be due to the feasibility of the project and the competition with the existing Besraya Expressway. Nonetheless, we do not expect the outcome to be out in the near term as the discussion could be prolonged due to land acquisition and final agreement on the concession terms. In the meantime, the management expects its associate, KEURO to announce the update on the signing of the concession agreement for the WCE highway project.       

Earnings visibility for the next 2-3 years.  In a nutshell, IJMCorp will likely be running at its full capacity after securing the WCE highway construction works. Its current order book now stands at c. RM1.7b for the next 2 to 3 years. We opine that its earnings visibility is fairly clear at this juncture while the potential WCE highway construction project will provide an additional 3 years earnings visibility to the group.      

Risk.  (1) The cancellation of the WCE project, (2) a spike-up in material prices (3) a sharp decrease in CPO prices below RM3100/MT and (4) slower take-ups for its property projects. 

Change to forecasts.  There are no material changes to our forecasts at this juncture even with IJMLand’s recent venture into UK property market. We have already factored in new contracts worth RM6.0b for FY13, which will be mainly driven by the construction of the WCE highway (RM4.0b to RM4.5b). 

Upgrade to OUTPERFORM.  We have upgraded our recommendation on IJMCorp with a higher  TP of RM5.74 (from RM5.56) based on SOP valuation as we increased our RNAV valuation for IJMLand.  

Source: Kenanga