‘Buy’ rating kept for IJM despite job cancellation


  • Business
  • Thursday, 11 Jul 2019

PETALING JAYA: The RM1.115bil tunnelling contract for the light rail transit 3 which was terminated by the MRCB-George Kent joint venture forms 14% of IJM Corp Bhd’s outstanding order book, according to a research house’s estimates.

AllianceDBS Research said the cancellation would reduce IJM’s order book to RM6.7bil from RM7.8bil at present.

Earnings-wise, the abrupt cancellation is expected to cut its income by some 2%-3%, according to AllianceDBS Research’s estimates.

“In terms of earnings impact, we have cut our financial year 2020 (FY20) to FY21 forecast by 2.3%-2.7%. However, we believe all costs incurred thus far will be reimbursed while IJM will also be seeking legal redress,” the research house said.

“In our earnings model, we had only assumed half of the contract value of RM1.115bil or RM575mil,” it added.

It also said that construction progress thus far had only involved preliminary stage works which have been completed, and this covered less than 5% or RM56mil of the total contract value.

IJM’s share price fell yesterday but the fall was limited.

The counter fell to an intra-day low of RM2.11 but recouped most of its losses by the end of the day, closing lower by five sen to RM2.38.

IJM’s major shareholders are the Employees Provident Fund (EPF), Amanah Saham Bumiputera, Retirement Fund Inc and Urusharta Jamaah.

The EPF is the single largest shareholder in IJM with about 15.5% stake.

Despite the contract cancellation, AllianceDBS Research has maintained its “buy” rating on IJM and increased its target price to RM2.65.

“While we lower our sustainable order book assumption to RM7.8bil (versus RM8.4bil), we raise our target multiple for construction to 16 times (versus 14 times previously). At 16 times, this would be still slightly below the -1 standard deviation of its five-year mean of 16.9 times,” it said.

“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 East Coast Rail Link revival, which will benefit three of its business divisions – construction, Kuantan Port and manufacturing,” it added.

Meanwhile, AmInvestment Bank Research said in its report that following this development, it has trimmed its FY20–FY22 net profit forecast by about 2% each, but raised IJM’s fair value by 5% to RM1.22 from RM1.16.

“We have changed our valuation method to sum of parts (SOP) from straight price-to-earnings ratio to reflect a better chance for IJM to realise fair valuations for its toll roads,” AmInvestment Bank said.

It said the valuation basis for IJM’s construction business that’s valued in the SOP valuation method remained unchanged at 10 times forward earnings.

This, it said, was in line with its benchmark forward target price-to-earnings ratio of 10 times for large-cap construction stocks.

The research house has maintained its “underweight” rating on IJM with a fair value of RM1.22.

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