Weak property market mutes IJM’s earnings prospect

Prospects will be challenging due to the slow award of new construction contracts, says analyst


WEAK property market sentiment and delays in construction billings will pressure IJM Corp Bhd’s earnings for its upcoming fourth quarter of 2020 (4Q20), observed analysts.

Affin Hwang Investment Bank Bhd analyst Loong Chee Wei said there is a possibility IJM’s 4Q20 results could come below market expectation, weaker than the recent quarter (3Q20) and 4Q19 due to the impact of Covid-19 pandemic.

Loong expects IJM’s performance in the 4Q to be weak on slow progress billings for construction and property divisions. The Chinese New Year holidays followed by the Movement Control Order (MCO) will likely have caused disruptions to construction works.

“IJM likely failed to meet its sales targets due to delay in the new property and high-end property overhang in the market that was further exacerbated by the pandemic.

“Prospects will be challenging for IJM due to the slow award of new construction contracts amid weak property demand,” he said.

AmInvestment Bank Bhd cut its IJM’s FY20-FY22F earnings forecasts by 17%, 17%, and 3% respectively, but kept its fair value relatively unchanged at RM1.25 based on “sum-of-parts” (SOP) method of valuation.

The firm now values IJM’s construction business (within the SOP valuation) at 12 times forward earnings from 10 times previously, to reflect a reduced market risk premium as investors globally have turned risk-on on optimism on the economy reopening.

“The earnings downgrade is to better reflect the direct and indirect impact of the MCO and Conditional MCO from March 18 to June 9, 2020, on the group’s construction, manufacturing, port activities, property sales and toll road collections,” the firm’s analyst Joshua Ng said in a note last Thursday.

AmInvestment expects IJM’s full-year 2020 (FY20) results due out on June 26, 2020, to come in at RM270 million to RM280 million at the core net level, adjusted for one-off items, particularly, the RM40 million impairment on the carrying value of its investment in Scomi Group Bhd.

“This will translate to a 33%-36% year-on-year decline versus a RM420.1 million core net profit registered in FY19,” Ng said.

Among the key culprits are the already weak first-nine months performance (prior to the pandemic); and the direct and indirect impact of the MCO during 4Q20 on IJM’s operations across the board.

AmInvestment estimates IJM currently has a construction orderbook of RM4.5 billion, which is less than half of RM9.4 billion it carried two years ago during the peak of the previous construction cycle in 2018.

“It only managed to secure an RM530 million contract for superstructure works of two residential towers in Tun Razak Exchange in FY20 (versus its guidance for RM2 billion).

“Our forecasts assume IJM to secure RM1.5 billion worth of new construction jobs annually in FY21-FY22F,” Ng added.

Given the still elevated national debt and depressed oil prices, AmInvestment believes the government has very limited room for fiscal manoeuvring which means it is unlikely to roll out new public infrastructure projects in a major way over the short term.

“On a straight price-to-earnings basis, IJM’s valuations are unattractive at 16-26 times forward earnings on muted prospects,” Ng said.