KUALA LUMPUR: Alliance DBS Research sees the potential selldown of IJM Corporation after the termination from MRCB-George Kent for its RM1.115bil tunneling contract for LRT 3 as an opportunity to Buy.
“Despite this negative setback, we are maintaining our Buyrating on IJM. We see any price weakness as an opportunity to buy the stock as we expect the government to accelerate its pump-priming efforts in 2020.
“IJM is also an excellent proxy to the ECRL revival (now expected post July 25) which will benefit three of its business divisions – construction, Kuantan Port and manufacturing. New order guidance for FY20F is set at RM2bil which may come from some internal jobs (Light Phase 2) and building jobs,” it said on Wednesday.
Alliance DBS Research also adjusted its sum-of-parts derived TP upwards to RM2.65 a share. While it lowered its sustainable orderbook assumption to RM7.8bil (vs RM8.4bil), it raised its target multiple for construction to 16 times (vs 14 times previously).
“At 16 times, this would be still be slightly below -1SD of its five-year mean of 16.9 times,” it said.
On the termination of the contract, the reason given is that the PDP-based project has been remodelled into one with a fixed price contract as per the government’s cost restructuring.
“We understand there were ongoing negotiations to scale down the contract by excluding a tunneling portion. Hence, this total termination came as a surprise,” it said.
The contract forms 14% of IJM’s total outstanding orderbook of RM7.8bn. The cancellation would reduce the company’s orderbook to RM6.7bil.
Alliance DBS Research said in its earnings model, it had only assumed half of the contract value of RM1.115bn or RM575m.
In terms of earnings impact, it cut its FY20-21F by 2.3-2.7%. However, it believes all costs incurred thus far will be reimbursed while IJM will also be seeking legal redress.
Only preliminary stage works have been completed so far, covering less than 5% or RM56m of the total contract value.
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