IJM upgraded on property upside

IJM CORP BHD

By Kenanga Research

Outperform (upgrade)

Target Price: RM5.74

WE are upgrading our recommendation on IJM from a “market perform” to an “outperform”.

Our upgrade is mainly premised on our in-house upgrade of IJMLand’s target price coupled with its still ample upside (+12%) from the current share price.

Following the recent news on the Selangor water issues, we understand that IJM’s joint venture (JV) project for the Pahang-Selangor Water Transfer Project (PSWT) is currently progressing well at above a 50% completion rate with the project financing, with Japan Bank for International Cooperation (JBIC), still intact. The management is in discussion with the Government to revive the NPE extension project with a new alignment, although the outcome is not likely to be decided in the near term.

Its associate, Kumpulan Europlus (KEURO) is expected to make the announcement on the finalisation of the West Coast Expressway (WCE) concession in the near term.

There are no material changes in our forecasts at this juncture, but we have increased our target price higher from RM5.56 to RM5.74 (+3%) following our upward revision on IJMLand’s revised net asset value (RNAV) for its property project in the United Kingdom.

We understand that there are concerns on the funding of the on-going PSWT project due to the fiasco in the Selangor water industry. To recap, a consortium led by Shimizu was awarded a RM1.3bil tunnelling (45km) contract for the PSWT project at the Pahang site.

IJM holds a 20% stake in the consortium together with UEM Builders (20%), Nishimatsu (30%) and Shimizu (30%). The project is slated for completion by late 2014 and management reiterated that JBIC is still financing the project.

We understand that the management is currently meeting with the Government to refresh the alignment of the proposed NPE highway extension project.

In our view, this could be due to the feasibility of the project and the competition with the existing Besraya Expressway.

Nonetheless, we do not expect the outcome to be out in the near term as the discussion could be prolonged due to land acquisition and final agreement on the concession terms.

In the meantime, the management expects its associate KEURO to announce the update on the signing of the concession agreement for the WCE highway project.

In a nutshell, IJMCorp will likely be running at its full capacity after securing the WCE highway construction works. Its current order book now stands at about RM1.7bil for the next two to three years.

We opine that its earnings visibility is fairly clear at this juncture while the potential WCE highway construction project will provide an additional three years’ earnings visibility to the group.

Risks involved would be the cancellation of the WCE project, a spike-up in material prices, a sharp decrease in CPO prices below RM3100 per metric tonne and slower take-ups for its property projects.

There are no material changes to our forecasts at this juncture even with IJMLand’s recent venture into the UK property market.

We have already factored in new contracts worth RM6bil for FY13, which will be mainly driven by the construction of the WCE highway (RM4bil to RM4.5bil).

By The Star