IJM Corporation - WCE agreement in a fortnight's time? BUY

Stock Name: IJM
Company Name: IJM CORPORATION BHD

Research House: AMMB

Price Call: BUY

Target Price: 7.23

- Maintain BUY on IJM Corp with an unchangedsum-ofparts-derived fair value of RM7.23/share. The Edge Weekly reported thatKumpulan Europlus is due to sign a concession agreement (CA) for the West CoastExpressway (WCE) within the next two weeks.

- This follows some changes to the CA although the salient detailsof the pact remain largely intact. K Euro has an 80% stake in West CoastExpressway Sdn Bhd, with IJM Corp holding the balance 20%.

- To recap, the WCE CA announced last January broadly encapsulates:-(i) A 60-year agreement that comes with a government support loan (GSL) ofRM2.2bil commencing 2013 @ 4% p.a.; (ii) Interest subsidy on commercial loans for22 years.

- In return, the government is to share toll revenue inaccess of an agreed traffic volume on a 70:30. The ratio is to revert to 30:70when GSL is fully repaid.

- Critics of the WCE had earlier said that apart from a neardoubling of its original cost estimate, the RM7bil highway has the longesttenure among expressways in Malaysia. Other concerns centred on the GSL andinterest subsidy accorded to the project. This had led to led to reports that theAttorney General's (AG) Chambers were re-looking at the terms of the CA.

- We gather that K Euro has since explained to the AG that theCA's terms are required to mitigate:- (i) its low traffic numbers (notably incoastal areas); (ii) difficulty in securing long-term funding; and (iii) anon-tolled stretch. In addition, the profit sharing ratio has been tweakedalong within a shorter tenure.

- We see IJM as the biggest beneficiary of an imminent crystallisationof WCE's CA, widely seen as the last remaining hurdle before the projectactually takes off. IJM had just last month bought a 20% direct stake in WCESdn Bhd for ~RM7mil (total effective stake: ~43%), providing a boost to thefunding viability of the highway. 

- Likewise, we believe IJM will likely participate in anyfund raising exercise that K Euro is tipped to embark on to raise ~RM2bil forthe WCE's equity portion. K Euro is also reportedly planning to divest some ofits assets for additional funds, including a 50% stake in Canal City and partof its interest in Trinity Corp (formerly Talam Corp).

- We foresee IJM as a frontrunner for over RM4bil worth of capexworks for WCE, in addition to spin-offs for its other units:- (i) increaseddemand for large-diameter piles for ICP; (ii) improved accessibility to IJMLand's upcoming Canal City project.  

Source: AmeSecurities