Analysts mixed on IJM’s LRT3 termination

IJM is currently consulting with its advisors and will seek appropriate legal redress under the LRT3 contract

By NG MIN SHEN / Pic By BLOOMBERG

THE termination of IJM Corp Bhd’s RM1.1 billion sub-contract for the Light Rail Transit Line 3 (LRT3) has triggered both negative and neutral reactions from analysts, with most expecting the construction firm to hold strong on a steady orderbook and its potential to continue the project if an open re-tender is held.

MIDF Amanah Investment Bank Bhd in a note yesterday downgraded the stock to ‘Sell’, as it believes the downside risk has turned more pronounced and could obstruct further upside potential to IJM’s share price.

“In our view, IJM will likely continue facing operational challenges stemming from the slowdown in the property and plantation segments.

“Concurrently, we saw its share price has priced in the improved sentiment on the construction sector amid the return of mega projects, namely the East Coast Rail Link (ECRL) and Bandar Malaysia,” it said.

Prior to the termination, IJM could have recognised LRT3 income from the financial year 2019 (FY19) up to FY21.

IJM on Tuesday announced it had been terminated as the works contractor for the underground package of the LRT3 from Bandar Utama to Johan Setia, due to the project being remodelled from a project delivery partnership model to a fixed price contract model, pursuant to the government’s direction.

Preliminary works had commenced before the project was suspended in June last year. IJM is currently consulting with its advisors and will seek appropriate legal redress under the contract.

“The LRT3 income was estimated to contribute 15% to its annual construction earnings. Thus, losing the contract will result in a 6% reduction to our earnings forecasts for IJM,” MIDF said.

IJM could also risk having other contracts such as its Mass Rapid Transit Line 2 (MRT2) job terminated, although MIDF said the possibility is remote, considering the progress work on the MRT2 was already at 55% as of May 2019.

The research firm said if the turnkey contractor calls for an open re-tendering of the work package, IJM “stands a fair chance” of winning as a sub-contractor.

JF Apex Securities Bhd also downgraded IJM to ‘Sell’ due to the recent rally in the firm’s share price, although it noted the contract termination may not be the final outcome.

The research house said Prasarana Malaysia Bhd — LRT3’s project owner — or the turnkey contractor may continue the LRT3 project with IJM by remodelling to a fixed price contract model.

“After taking into account the termination of the LRT3 project, we expect a lower group orderbook of RM6.9 billion,” it added.

Hong Leong Investment Bank Bhd (HLIB) maintained its ‘Buy’ call on the stock as it did not factor in any contribution from the underground package to the group’s earnings forecast.

“We expect short-term sentiment to be affected by this negative news, but we deem any significant weakness in share price to be a good opportunity for accumulation as we did not factor in contribution from the package previously,” it said.

It also sees IJM as a direct beneficiary of the ECRL via construction contracts and the positive spillover effect to Kuantan Port Consortium Sdn Bhd, in which IJM holds a 60% stake, and the Malaysia-China Kuantan Industrial Park, where IJM owns 20%.

The termination was also a “negative surprise” to HLIB, as the research firm had forecast the company to retain the contract with a different scope of works and lower costs.

After stripping out the underground package contract value, IJM’s outstanding orderbook stands at RM6.7 billion and “still has a healthy cover ratio” of 3.4 times FY19 construction revenue.

Meanwhile, Kenanga Investment Bank Bhd said it is ‘Neutral’ on the termination of the LRT3 contract, as it has stopped recognising any LRT3 contribution from the group’s outstanding orderbook since the cost review for the project took place.