IJM Corporation - WCE agreement sealed BUY

- Maintain BUY on IJM Corp with an unchanged fair value of RM5.71/share, pegged at a10% discount to its sum-of-parts (SOP) value of RM6.34/share.

- Kumpulan Europlus (KEuro) has announced that its 80%-owned subsidiary West Coast Expressway Sdn Bhd (WCE Sdn Bhd) has entered into a concession agreement (CA) with the federal government in relation to the West Coast Expressway (WCE) project.

- Briefly, the CA provides WCE Sdn Bhd with the rights to develop the 233km highway from Banting (Selangor) to Taiping (Perak) – including a 40km-stretch to be built at a later stage. IJM holds an effective stake of ~43% in the highway concession, including 20% held directly.   

- Earlier reports had indicated that some of the concerns surrounding the WCE project related to its tenure as well as funding means. The estimated cost as disclosed last January was ~ RM7bil. Hence, the CA effectively sets out the final terms of the deal.

- This is a long-awaited but significant development for IJM, as the WCE is a key re-rating catalyst for the group’s future order flows. 

- More importantly, we estimate that the WCE could present over RM4bil worth of job opportunities to IJM – and more than double its existing order flows to a record RM7bil-RM8bil. 

- The crystallisation of the CA could pave the way for the award of works from 2H13 onwards, once the highway’s funding needs are fully addressed. Apart from new equity, we gather that KEuro is looking at a few options to raise fresh funds, including the disposal of its 50% stake in Bandar Rimbayu.

- Based on just a 20% share of capex works on a lower cost base of RM6bil and effective 43% stake in the WCE concession, our initial calculations will lift its fair value by 8% to RM6.18/share.

- In addition, the WCE also presents positive spin-offs for its other units:- (i) increased demand for large-diameter piles for ICP; and (ii) improved accessibility to IJM Land’s upcoming Bandar Rimbayu project.

- We expect renewed interest on IJM on stronger order book visibility in the coming months, especially when newsflow on the award of the WCE packages picks up. Trading at trough PE valuations, we recommend investors to accumulate IJM for selective repositioning to Malaysian contractors post elections. 

Source: AmeSecurities