IJM Corporation Bhd
(April 14, RM4.86)
Upgrade to buy at RM4.83 with higher target price of RM5.45: We are turning bullish on IJM following our recent meeting with the management.
Tenders have been on the rise and construction margins are expected to recover in FY11. IJM also stands to be a key winner of more road jobs in India while its industries and property divisions are expected to remain strong. We raise our FY11 to FY12 earnings by 5% to 8%.
IJM's order book balance currently stands at about RM4.2 billion (RM3.6 billion excluding the stalled IT Tower in Pakistan). The management said it experienced an increase in tenders during the 4Q09 to 1Q10 period, with tenders totalling RM4 billion.
At the "point of tender", PBT (profit before tax) margin estimates stood at 6% to 8%. Note that the sum tendered excludes jobs being directly negotiated or those for which IJM has been approached by potential clients. We assume a total RM2 billion in new jobs for FY11 to FY12 (RM1.49 billion in FY10).
Construction margins have remained suppressed since 2QFY09 due to outstanding "legacy jobs" in India, and newly secured jobs that have yet to go into full swing (no profits are recognised until completion hits 10%). We expect construction margins to remain at current levels until 1QFY11 before making a more meaningful recovery. This is rather in line with the management's guidance that construction margins will only revert to normalised levels in FY12.
India intends to construct 53,639km of roads in seven phases from now up to 2012. Some US$20 billion (RM64 billion) worth of road jobs are expected to be awarded by 1H10. We understand that Malaysia's Construction Industry Development Board (CIDB) is in negotiations with the National Highway Authority of India (NHAI).
Under this framework, NHAI will allocate some of the road projects to CIDB, which will then decide how to award them to Malaysian contractors. Having completed 1,406km of roads in India, we see IJM as a clear beneficiary.
We continue to see strong contributions from its industries division, with a potential surprise from 82%-owned ICP Jiangmen, which has a monthly capacity of 20,000 tonnes and is about 50% utilised. Higher orders could potentially be driven by the implementation of the Hong Kong-Macau-Zhuhai Bridge and the expansion of ports in Guangdong province. We gather that there is potential for ICP Jiangmen to double its capacity.
The management expects properties to be the "star performer" in FY11. For the 9MFY10 period, sales totalled RM970 million, with RM800 million unbilled. Its Light Linear and Light Point developments in Penang (RM320 million collective gross development value) are now 70% to 85% sold. As The Light development commands higher margins (over 20% PBT), we see its blended property margins being lifted in FY11 as works have commenced.
We raise our FY11 earnings forecasts by 5.4% and that for FY12 by 8.1% (FY10 unchanged), which incorporates a construction margins recovery and stronger property revenue recognition.
Besides the earnings adjustments, we are making the following changes to our sum-of-parts (SOP) valuation: cut our construction earnings multiplier from 15 times to 14 times in line with the sector average, raise our industries earnings multiplier from nine times to 10 times given the strong performance, mark to market its stake in listed entities, mainly IJM Land (not rated) and remove our 10% discount to SOP valuation.
We upgrade the stock to buy. Our RM5.45 target price implies 18.3 times FY11 earnings, representing some one standard deviation above its historical mean price-earnings ratio (PER). We think such bullish parameters are achievable given IJM's construction margin recovery, news flow arising from more project awards and a sizeable pool of concession assets. - OSK Research, April 14
This article appeared in The Edge Financial Daily, April 15, 2010.
(April 14, RM4.86)
Upgrade to buy at RM4.83 with higher target price of RM5.45: We are turning bullish on IJM following our recent meeting with the management.
Tenders have been on the rise and construction margins are expected to recover in FY11. IJM also stands to be a key winner of more road jobs in India while its industries and property divisions are expected to remain strong. We raise our FY11 to FY12 earnings by 5% to 8%.
IJM's order book balance currently stands at about RM4.2 billion (RM3.6 billion excluding the stalled IT Tower in Pakistan). The management said it experienced an increase in tenders during the 4Q09 to 1Q10 period, with tenders totalling RM4 billion.
At the "point of tender", PBT (profit before tax) margin estimates stood at 6% to 8%. Note that the sum tendered excludes jobs being directly negotiated or those for which IJM has been approached by potential clients. We assume a total RM2 billion in new jobs for FY11 to FY12 (RM1.49 billion in FY10).
Construction margins have remained suppressed since 2QFY09 due to outstanding "legacy jobs" in India, and newly secured jobs that have yet to go into full swing (no profits are recognised until completion hits 10%). We expect construction margins to remain at current levels until 1QFY11 before making a more meaningful recovery. This is rather in line with the management's guidance that construction margins will only revert to normalised levels in FY12.
India intends to construct 53,639km of roads in seven phases from now up to 2012. Some US$20 billion (RM64 billion) worth of road jobs are expected to be awarded by 1H10. We understand that Malaysia's Construction Industry Development Board (CIDB) is in negotiations with the National Highway Authority of India (NHAI).
Under this framework, NHAI will allocate some of the road projects to CIDB, which will then decide how to award them to Malaysian contractors. Having completed 1,406km of roads in India, we see IJM as a clear beneficiary.
We continue to see strong contributions from its industries division, with a potential surprise from 82%-owned ICP Jiangmen, which has a monthly capacity of 20,000 tonnes and is about 50% utilised. Higher orders could potentially be driven by the implementation of the Hong Kong-Macau-Zhuhai Bridge and the expansion of ports in Guangdong province. We gather that there is potential for ICP Jiangmen to double its capacity.
The management expects properties to be the "star performer" in FY11. For the 9MFY10 period, sales totalled RM970 million, with RM800 million unbilled. Its Light Linear and Light Point developments in Penang (RM320 million collective gross development value) are now 70% to 85% sold. As The Light development commands higher margins (over 20% PBT), we see its blended property margins being lifted in FY11 as works have commenced.
We raise our FY11 earnings forecasts by 5.4% and that for FY12 by 8.1% (FY10 unchanged), which incorporates a construction margins recovery and stronger property revenue recognition.
Besides the earnings adjustments, we are making the following changes to our sum-of-parts (SOP) valuation: cut our construction earnings multiplier from 15 times to 14 times in line with the sector average, raise our industries earnings multiplier from nine times to 10 times given the strong performance, mark to market its stake in listed entities, mainly IJM Land (not rated) and remove our 10% discount to SOP valuation.
We upgrade the stock to buy. Our RM5.45 target price implies 18.3 times FY11 earnings, representing some one standard deviation above its historical mean price-earnings ratio (PER). We think such bullish parameters are achievable given IJM's construction margin recovery, news flow arising from more project awards and a sizeable pool of concession assets. - OSK Research, April 14
This article appeared in The Edge Financial Daily, April 15, 2010.
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