RHB Research is upbeat on the growth trajectory of throughput volume at Kuantan Port in 2019
KUALA LUMPUR: RHB Research has upgraded IJM Corp to Buy from Neutral with new sum-of-parts based target price of RM2.78 from RM1.91, 18% upside plus 3% yield.
It said on Friday this comes on improved visibility in terms of securing new construction orders, a possible upward revision in new property sales for FY20F, the possible disposal of its toll road assets at fair value thus giving rise to the possibility of special dividends; and robust growth expectations for Kuantan Port.
“We expect earnings to grow at a CAGR of 9.7% during FY20F-22F,” it said.
RHB Research said while the loss of the contract dealt a blow to IJM – the RM1.1bil contract formed 14% of its RM7.8bil outstanding orderbook – it is not entirely detrimental to the company, in its view.
For starters, the contract was likely to be scaled-down significantly anyway – by more than 30% based on its estimates, if it had remained.
Meanwhile, minimal work and investments pertaining to the contract were done. Seen positively, uncertainties on the outcome of negotiations regarding IJM’s LRT3 contract have not been lifted.
“The share price correction, albeit shallow, could present investors who missed out on IJM’s impressive YTD rally with an opportunity to purchase its shares,” it said.
RHB Research expects construction revenue to increase at a CAGR of 5% during FY20F-22F (Mar). This is underpinned by an ex-LRT3 outstanding orderbook of RM6.7bil.
Looking forward, it is forecasting PBT margins to normalise at 8-10%. This should be achievable given IJM’s expertise in building design and build works, highways, and rail-related infrastructure.
Management is turning more aggressive in FY20, guiding for a RM2bil new orderbook replenishment target – a significant increase over FY19, where it secured a single contract worth RM500mil.
“Following the Ministry of Finance’s offer to acquire LDP, SPRINT, KESAS and SMART for MYR6.2bn, IJM’s toll assets could be next, in our view. In particular, the Besraya and Lekas highways could be crucial targets, as both currently receive compensation from the Government for deferring toll rate hikes.
“The NPE highway, should also be an ideal acquisition target, as it has a high average daily traffic figure (>200,000 vehicles), hence reducing traffic users’ financial burden.
“It is also profitable, registering FY18 PBT of RM94mil. Based on our estimate, the equity value of these three toll assets (Besraya, Lekas & NPE) could amount to RM2.46bil. This translates to 68 sen a share, and could be used to pay special dividends.
“Better performance expected for Kuantan Port. 3M19 throughput volume rose 61% from 4m FWT to 6.5m FWT. Throughput volume in 2019 is on track to grow at a healthy pace, as 3M19 volume made up 36% of 2018’s volume.
“We are upbeat on the growth trajectory of throughput volume at Kuantan Port in 2019, forecasting throughput volume of 23.5m FWT, +15% YoY growth. This is premised on improved activity at Malaysia-China Kuantan Industrial Park (MCKIP), the lifting of moratorium on bauxite mining, and increased activity in preparation for the East Coast Rail Link (ECRL),” it said.
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