IJM Corp Bhd (Feb 6, RM4.98)
Maintain buy at RM5 with a target price of RM6.63: IJM Corp has announced that it has entered into a MoU with a strategic investor, Guangxi Beibu Gulf International Port Group Co Ltd (Guangxi), to dispose of 40% of its equity interest in Kuantan Port Consortium Sdn Bhd (Kuantan Port). The preliminary valuation for the disposal is RM310 million.
The proposed disposal will not have any binding effect until both parties enter into a definitive agreement, which will be executed within six months of the date of the MoU. The proposed disposal also requires the approval of the government.
We are not entirely surprised with the news as it is actually part of IJM Corp’s RM3 billion expansion plan of its port business. According to the management, IJM Corp, together with the strategic investor Guangxi, will build a new deep water terminal that will allow vessels of up to 200,000 deadweight tonnage to berth.
The expansion of Kuantan Port is part of the Malaysia-China Kuantan Industrial Park (MCKIP) into which Guangxi will pour more than RM7 billion directly or via joint ventures with Malaysian companies. Other projects under MCKIP are an integrated steel plant, an aluminium processing plant and a palm oil refinery.
We are also positive on the news as the RM310 million price tag (RM775 million for a 100% stake) of the Kuantan Port is 26% higher than our valuation of the Kuantan port, that is RM246.1 million (40% of RM615.3 million). In addition, according to our transport analyst, the RM310 million price tag, price-earnings ratio (PER) of 10.3 times forecast financial year 2013 (FY13F), is reasonable, only 9% lower than its peer NCB Holdings Bhd’s PER of 11.4 times. NCB has a bigger capacity and earnings base than Kuantan Port.
According to the management, the proceeds of the disposal will be utilised to finance part of the RM3 billion capital expenditure plan to expand the port business and for working capital. The management also thinks the proceeds will not be utilised to pay special dividends to shareholders.
Pending the official definitive agreement for the proposed disposal, we are leaving our forecast unchanged. As at end-FY12, Kuantan Port’s pre-tax profit contributed only 5.3% to IJM Corp’s total pre-tax profit. Assuming the MoU materialises, we estimate earnings will be diluted by 6.3% in FY14F. Nonetheless, the earnings dilution will be only for the short term as we believe future earnings after the construction of the port expansion will compensate for the dilution.
All in, we are positive on the news. If the MoU materialises with the unchanged valuation of RM310 million or RM2.58 sen per share, our sum-of-parts (SOP) valuation will increase by 11.5 sen to RM6.75. We believe Guangxi’s plan to expand the Kuantan Port will unlock earnings for IJM Corp’s port business in the foreseeable future. We advocate investors “buy” IJM with an unchanged target price of RM6.63 based on our SOP valuation. All in, we like IJM Corp given its strategic diversified operations, visible order book replenishment prospects (especially from the West Coast Expressway), and strong RM1.6 billion unbilled property sales. — MIDF Research, Feb 6
This article first appeared in The Edge Financial Daily, on February 7, 2013.