IJM Corporation - Selling a 40% stake in Kuantan Port

News     IJM Corp Bhd (“IJM”) announced that it had entered into a MoU with Guangxi Beibu Gulf International (Guangxi) to dispose off its 40% stake in Kuantan Port Consortium (“KPC”) to the latter. The MoU stated that the preliminary price tag for the disposal would be at RM310m. The MoU will be for a period of six months before the issuance of a Definitive Agreement (“DA”). As for now, the actual sale consideration has not been finalised yet. 

  

Comments   We are positive on the sale as the collaboration with Guangxi will spur more activities at the port. On top of that, the proposed 60-year concession will be a positive for KPC’s future cash flow.

 Key conditions precedent.  The proposed disposal is subject to the government’s approval of the 60-year concession agreement to KPC. At present, KPC holds a 30-year concession which is expiring by 2027 (14 years left). The 60-year concession will add another 46 years extension to the existing concession.       

 Price tag is fair. Based on our calculations, the price tag of RM775m for KPC translates into a 14x FY13 PER.  This is within the range of its peers i.e. Biport (MP, TP: RM7.18) at 17.0x and (2) NCB (Not Rated) at 10.0x. Based on its existing 30-year concession agreement, we value KPC only at RM292m. However, the extension of concession will lift up its valuation to RM740m based on a DCF valuation (WACC at 7.0%). Based on the parameters, the price tag is considered fair in our view. 

 Capacity expansion.  Based on the news, KPC is expected to spend about RM3.0b to expand its capacity. Assuming a debt-to-equity ratio of 80:20, KPC will need to fork out c.RM600m for its equity portion. We do not see any problem for IJM to fork out the cash for its proposed 60% equity in KPC at RM360m to finance the CAPEX. 

 Spillover benefits.  Guangxi is expected to attract more investors into the steel industry, aluminium-processing plants and edible oil processing plants in Pahang.  On a longer term view, this will be a catalytic project  to spur more traffic in Kuantan Port. We also believe that  this is part of the Government-to-Government initiative between Malaysia and China.         

  

Outlook  Neutral in the near term.

  

Forecast  No changes to our FY13-14E forecasts. However, should the MoU materialise, our FY13E and FY14E earnings will be reduced by 6% and 5% respectively. 

  

Rating    Maintain MARKET PERFORM

 We expect fewer catalysts for IJM in the near term due to the upcoming general election uncertainties.

  

Valuation   There is no change to our Target Price of RM4.72, which is based on SOP valuation. Post the disposal, our Target Price will be increased by 2% to RM4.83 due to the accretion in the concession value. 

  

Risks    (1) Escalating building material prices and (2) political risk.  

Source: Kenanga