Wednesday, December 15, 2010

IJM - IJM Corp morphing into infrastructure powerhouse

Stock Name: IJM
Research House: AMMB

IJM Corporation Bhd
(Dec 14, RM6.20)
Maintain buy at RM6.20 with revised fair value of RM7.52 (from RM6.30): We maintain our 'buy' call on IJM Corp Bhd with a higher sum-of-parts (SOP) derived fair value of RM7.52 per share (previously: RM6.30 per share).

IJM Corp is poised to be a key beneficiary of an imminent rollout of the government's Economic Transformation Programme, with an added kicker from the proposed IJM Land-MRCB pact.

IJM Corp's exciting new contract pipeline centres on a few key areas: (i) RM43 billion Klang Valley LRT/MRT; (ii) seven new highways worth RM19 billion (for example, the West Coast Expressway or WCE); (iii) balance of works for the Pahang-Selangor water project (circa RM5 billion); (iv) several mega development proposals within Greater KL (for example PNB's 100-storey tower); and (iv) new infrastructure opportunities in India.

Near-term, an IJM Land-MRCB union provides the impetus for IJM to morph into an integrated infrastructure and property giant ' with the Emplyees Provident Fund as the major shareholder.

First, we expect IJM Corp to play a front-running role in several exciting infrastructure and development projects under the EPF's mandate, including the prized MRB land in Sungai Buloh. This is further solidified by IJM Corp's status as a premium builder of Grade-A buildings that are likely to dominate the Klang Valley skyline.

Second, it could pave the way for IJM Corp to unlock further value via a listing of its infrastructure units (including its Indian highways) and potentially elevate the group to the second largest highway operator in Malaysia after PLUS. Presently, infrastructure assets account for RM1.93 share or 26% of IJM Corp's SOP value.

Just premised on (i) a 20% controlling stake in the IJM Land-MRCB pact and (ii) a 20% stake in WCE Concession/Capex works, IJM Corp's SOP-based value is forecast to rise by 6% to RM7.95 per share along with a near tripling of its order book to RM9.4 billion.

Our FY12F/13F new contract forecasts are raised by 10% to 15% to RM2.2 billion to RM2.5 billion. Construction margins appear to have bottomed ' rising to 5.1% to 8.3% in FY11F/13F (FY10: 2.2%) as legacy jobs are due to be completed by end-FY11.

We recommend a switch away from Gamuda Bhd to IJM Corp for exposure to big-cap construction stocks, given the latter's more exciting news flow and prolific contract pipeline. According to our estimates, every RM500 million of new order book would lift its earnings by 1.4% to 5.6%.

Renewed interest from foreign shareholders, who now control circa 43% of IJM Corp against a peak of more than 60% in 2007, is another re-rating catalyst with a strengthening ringgit. ' AmResearch, Dec 14

This article appeared in The Edge Financial Daily, December 15, 2010.

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