ALLIANCEDBS Research has maintained its buy call on IJM Corp Bhd with some-of-parts (SOP)-derived target price of RM2.65. It said IJM’s share price has done well, up 40% in 2019 and now trading at FY20F PE and P/BV of 17x and 0.8x respectively which is still at -1SD below mean.
In a note on Feb 4, the research house said the key share price driver for IJM appears to be new contract wins and to some extent earnings growth. In spite of its conglomerate structure, construction wins appear to be the most direct critical factor.
However, there is also a negative correlation of 0.7x with steel prices as IJM has a fair share of building contracts in its order book. There is no direct correlation with crude palm oil (CPO) prices as IJM Plantations is listed.
“We still like the stock as a proxy to the East Coast Rail Link (ECRL) as well as general recovery in the Malaysian economy,” said the research house.
It noted the revival of ECRL has seen its industry division receive a few million ringgit worth of orders for piles. This may potentially rise further once the project is in full swing.
“However, we understand the piles used for ECRL are mid-sized and hence margins are less lucrative than for the large-sized piles which are used to construct ports,” it said.
Nevertheless, the research house believes IJM will still be more selective when bidding for projects, given its peak order book.
But IJM remains a reputable contractor with a strong execution track record and balance sheet, and may still be present in large-scale infrastructure projects when they are eventually implemented.
“We believe IJM’s strong management and execution track record is a big plus in this changing construction market. Its solid balance sheet allows it to fund and participate in larger-scale projects without having to raise equity.
“Surprisingly, its property division is also doing better than expected and managed to bring down inventory levels. It may look to monetise up to RM9 bil of land bank. Kuantan Port’s throughput will receive a boost from Alliance Steel and is set to improve further with more investments.”
IJM’s net debt as at Sept 30, 2019, was RM5.2 bil. While this seems on the high side, about 86% of the outstanding debt is ring-fenced against cash flows from its concession assets (non-recourse debt).
The counter opened 2.93% higher at RM2.11 before the midday break on Feb 4. – Feb 4, 2020
