by SHAZNI ONG/ pic by BLOOMBERG
IJM Corp Bhd which recently lost a RM1.12 billion Light Rail Transit Line 3 (LRT3) project, is expected to bounce back and could benefit from the RM44 billion East Coast Rail Link (ECRL) project.
Hong Leong Investment Bank Research (HLIB Research) in a report said, IJM is among the top picks in the construction sector especially in the second half of the year.
HLIB Research analyst Yip Kah Ming said IJM was their favourite in the large-cap space as the company is expected to be a beneficiary of the ECRL project via construction contracts and the positive spillover effect to Kuantan Port Consortium Sdn Bhd (KPC).
IJM holds a 60% stake in KPC and 20% in Malaysia-China Kuantan Industrial Park.
HLIB Research has a ‘Buy’ rating on IJM with a target price of RM2.96. IJM’s share price plummeted after its LRT3 contract was terminated by MRCB George Kent Sdn Bhd.
It has also announced that it would seek “appropriate legal redress” following the termination as the works package contractor (WPC) for the underground package of project.
HLIB Research maintained its ‘Buy’ call on the stock as the termination would not have any significant effect 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.
The termination was also a “negative surprise” to HLIB, as the research firm had forecast the company to retain the contract with different scope of works and lower costs.
However, MIDF Amanah Investment Bank Bhd on July 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.
Prior to the termination, IJM could have recognised LRT3 income from the financial year 2019 (FY19) up to FY21.
The termination of LRT3 from Bandar Utama to Johan Setia was due to the project being remodelled from a project delivery partnership model to a fixed-price contract model, pursuant to the direction of the government Preliminary works had commenced before the project was suspended in June last year.
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 MRT2 was already at 55% as of May 2019.
The research firm said if the turnkey contractor calls for an open retendering of the work package, IJM “stands a fair chance” of winning as a subcontractor.
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.
IJM also announced changes at its board level earlier this week.
It said Datuk Soam Heng Choon will retire as the MD upon the conclusion of the company’s AGM on Aug 28, 2019.
In an exchange filing on Monday, the diversified group noted Soam, who is attaining the age of 60, will remain as CEO until Aug 31, 2019.
IJM construction division MD Liew Hau Seng, 53, will be appointed as the new CEO and MD with effect from Sept 1, 2019.
Shares of IJM closed one sen or 0.42% lower at RM2.38 yesterday, giving it a market value of RM8.64 billion.
HLIB Research has maintained its ‘Neutral’ stance on the sector despite given the positive news flow on several project revivals such as ECRL, Bandar Malaysia and potentially High-speed Rail and MRT3.
“We believe the worst is over for the construction sector but this has been largely reflected by the run in contractor’s share price year-to-date with the Bursa Malaysia Construction Index up +47%.
“Within the mid-small cap space, we like Sunway Construction Group Bhd as a well-managed pure construction play that is able to bid competitively within the increasing open tender landscape, and George Kent (M) Bhd which as the only domestic rail systems specialist should benefit from the revival of rail projects,” he said.