IJM Corporation - 40% divestment in Kuantan Port to Guangxi BUY

• Maintain BUY on IJM Corp with an unchanged fair value of RM5.71; pegged at a 10% discount to its sum-of-parts (SOP) value of RM6.34/share. IJM’s wholly-owned unit, Road Builder (M) Holdings Bhd, has entered into an MoU with China’s Guangxi Beibu Gulf International Port Group Co. Ltd for the disposal of a 40% stake in Kuantan Port Consortium Sdn Bhd (KPC) for RM310mil.

• The MoU is not binding until a definitive agreement (DA) is reached. The DA is expected to be executed within six months from the MoU. The conditions are as follow: -  Approval from the Federal government and/or other government-related authorities.  -  Changes in the shareholding in KPC as per its privatisation agreement on 22 November 1997 with the Federal government. 

-  Grant of a 60-year concession to KPC for the existing Kuantan Port, and another deal with a similar tenure for the development of a new deep-water terminal.

-  A JV between Road Builder and Guangxi (60:40) is to be set up to acquire and develop some 700-acres of industrial land located north of Kuantan Port. In addition, Guangxi would take pro-active steps to introduce investors for a steel mill plant, an aluminium-processing plant and an edible processing plant to Kuantan.

-  Written-undertaking from the Federal government to bear the cost of dredging for the new deep water port.

• Guangxi has various infrastructure units, including the operations & management of ports. Those that are under its belt in Southern China are Fangchenggang Port, Qinzhou Port, Tieshan Port and Beihai Port.

• We view the deal as a strategic move by IJM to raise capital and drive Kuantan Port’s future expansion– notably with a new deep water port firmly in the pipeline.

• IJM, via Road Builder, currently owns a 100%-stake in KPC – the concession holder for the existing Kuantan Port.  In FY12, Kuantan Port raked in RM95mil or ~12% of the group’s pre-tax profits.

• We maintain our forecast for now pending further progress on the MoU. By extrapolation, the benchmark valuation for Guangxi’s 40% stake in KPC – at 100% –  is RM775mil or roughly 5% lower than our estimate of RM818mil (PE: 10x).

• But, we see more upside coming from a potential extension to the existing concession along with thedevelopment of the new deepwater terminal.      

Source: AmeSecurities