IJM Corportion - Partnership with Scomi: the proof is in the pudding BUY

- Maintain BUY on IJM Corp with a higher fair value of RM5.71/share (previously: RM5.42/share). We recently attended a briefing by Scomi’s management. Below are the key takeaways. 

- Apart from being a highly institutionalised and professionally-driven outfit, Scomi’s management reasoned that it had chosen IJM as a partner for the latter’s project management expertise. Indeed, IJM has vast experience handling civil engineering works in India – a key market for Scomi’s monorail business.

- Scomi’s order book stands at ~RM3bil, including its latest win of a RM120mil charter contract for Indonesia’s  PT Pertamina that was announced just last week. Post its internal restructuring and asset divestments, Scomi is open to exploring more oil & gas opportunities together with IJM. 

- Scomi confirmed that it had put in two bids for risk-sharing contracts (RSC) under PETRONAS. This comes after the local press reported that Scomi was among the frontrunners for the Cenang and Tembikai marginal oilfields valued at US$200mil and US$400mil, respectively, via a tie-up with Australia’s Cue Energy.

- More importantly, Scomi does not see any urgent need to raise additional equity if it secures any new oil & gas jobs (including the Petronas’ RSCs). This validates our view that IJM will likely not need to pour more funds in Scomi.    

- Scomi’s management further guided that the risk of any significant impairment charges/provisions is minimal going forward. In fact, the group is targeting a higher EBITDA of ~RM300mil next year – part of it through a backloading of earnings from its Mumbai monorail job by 1H13.

- But, we believe IJM would still need to show some concrete results to prove its investments in Scomi  are indeed value-accretive. We are also unsure about the exact structure IJM can participate in any partnerships with Scomi – notably in the oil & gas field.

- Under an extreme scenario, we estimate that the maximum loss to IJM is RM0.10/share (or ~2% of its sum-of-parts (SOP) value – assuming a full-write off of its investments in Scomi totalling ~RM149mil.

- The RM110mil convertible bonds in Scomi that IJM will subscribe for comes with a yield of 10% (if Scomi redeems) and is secured with Scomi’s stake in Scomi Marine (up to 66% post-restructuring).

- Furthermore, our fair value of RM5.71/share for IJM already incorporates a 10% discount to its SOP to reflect any nearterm uncertainties over its entry into Scomi.    

Source: AmeSecurities