IJM Corp Bhd
(April 8, RM4.88)
Upgrade to buy at RM4.80 with higher target price of RM5.50: We believe near-term news flow on potential awards could intensify in the months leading to the announcement of the 10th Malaysia Plan, and as IJM begins bidding more aggressively for contracts in India.
The outlook for the non-construction divisions remains positive. We revise our earnings forecasts, and raise our target price following a change in methodology.
In our view, IJM's recent lacklustre order flow in India was due to a deliberate decision by the management to cut back on tenders amid an environment of high operating costs.
Cost escalation clauses stipulated in government contracts failed to fully compensate contractors for the spike in raw material prices, namely steel and cement, in 2007 and 2008.
With the recent normalisation of building material prices and borrowing costs, we believe the management will resume normal bidding for Indian jobs. We assume construction pre-tax margins of 2% in FY10 and 3.5% in FY11.
We expect IJM's construction margin to remain depressed in FY11, given the still significant legacy contracts on the books, about a third of IJM's RM3.2 billion order book as at March. We forecast the construction division to account for only 12% of IJM's FY11 earnings.
We expect the property and building materials divisions to remain as IJM's main earnings contributors, accounting for 31% and 30% of IJM's FY11 earnings respectively, while plantations and infrastructure would account for 17% and 10% respectively.
Our revised FY10 net profit implies earnings of RM100 million in 4QFY10, which is up 20% quarter-on-quarter, driven by stronger plantation earnings given the higher CPO price. - Maybank IB, April 8
This article appeared in The Edge Financial Daily, April 9, 2010.
(April 8, RM4.88)
Upgrade to buy at RM4.80 with higher target price of RM5.50: We believe near-term news flow on potential awards could intensify in the months leading to the announcement of the 10th Malaysia Plan, and as IJM begins bidding more aggressively for contracts in India.
The outlook for the non-construction divisions remains positive. We revise our earnings forecasts, and raise our target price following a change in methodology.
In our view, IJM's recent lacklustre order flow in India was due to a deliberate decision by the management to cut back on tenders amid an environment of high operating costs.
Cost escalation clauses stipulated in government contracts failed to fully compensate contractors for the spike in raw material prices, namely steel and cement, in 2007 and 2008.
With the recent normalisation of building material prices and borrowing costs, we believe the management will resume normal bidding for Indian jobs. We assume construction pre-tax margins of 2% in FY10 and 3.5% in FY11.
We expect IJM's construction margin to remain depressed in FY11, given the still significant legacy contracts on the books, about a third of IJM's RM3.2 billion order book as at March. We forecast the construction division to account for only 12% of IJM's FY11 earnings.
We expect the property and building materials divisions to remain as IJM's main earnings contributors, accounting for 31% and 30% of IJM's FY11 earnings respectively, while plantations and infrastructure would account for 17% and 10% respectively.
Our revised FY10 net profit implies earnings of RM100 million in 4QFY10, which is up 20% quarter-on-quarter, driven by stronger plantation earnings given the higher CPO price. - Maybank IB, April 8
This article appeared in The Edge Financial Daily, April 9, 2010.
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