IJM Corporation - Near-term uncertainties over Scomi deal; but core fundamentals remain intact Buy

- Maintain BUY on IJM Corp with a lower fair value of RM5.42/share (previously: RM6.38/share), as we peg a 15% discount to its Sum-Of-Parts value to reflect near-term uncertainties over its entry into Scomi Group. 

- Recall, the deal entails IJM paying up to RM149mil  in return for up to a 25% stake in Scomi via: (i) New share issuance representing a 10% stake in Scomi @ RM0.33/share (RM39mil; and (ii) Subscription of RM110mil zero-coupon redeemable convertible secured bonds of Scomi (conversion price: RM0.365/share). 

- The bonds are convertible within three years and secured by Scomi’s 43% stake in Scomi Marine. IJM will also hold three board seats within all of Scomi’s units – including Scomi Marine and 67%-owned Scomi Engineering.

- Management explained that IJM is seeking to gain a foothold on the oil & gas industry via Scomi. We consider IJM’s entry price into Scomi to be fairly reasonable at annualised PE of 12x and 1.3x P/NTA. 

- Scomi is the dominant licensed provider of drilling fluid services in Malaysia. This may eventually pave the way for IJM to forge JVs with Scomi to bid for future oil & gas jobs.  

- Scomi’s total orderbook stands at RM2.9bil. It was recently reported to be among frontrunners for the Tembikai and Cenang marginal fields - valued between US$200mil and $400mil - via a tie-up with Australian-based Cue Energy.

- IJM’s latest move, however, appears not to have been wellreceived by the market (share price down 19% for the past two days) – more so with Scomi’s patchy earnings track record. This also comes just shortly before Scomi’s RM200mil MTNs are due by month-end. 

- Equally, investors are concerned that IJM may need  to pour in more funds into Scomi although IJM does not think so. Earnings-wise, we expect near-term contributions from Scomi to be insignificant. Annualised, Scomi’s current 1H net profit is only ~4% of IJM’s FY13F core profits. 

- The Scomi issue aside, we still regard IJM as a well-run construction giant with a diversified earnings base. Indeed, IJM would be in for a swift re-rating once more clarity emerges on domestic flows post-elections (e.g. WCE, NPE Extension, Kuantan Port extension). 

- Hence, we view any near-term weakness as a buying opportunity. The stock is presently trading at or close to its trough PE of 11x. Its foreign shareholding level – 38% as at end-August – should also be gravitating towards the lows of ~30% back in 2008 following the recent sell-down.    

Source: AmeSecurities