MIDF: IJM’s potential disposal of plantation division timely to strengthen balance sheet

KUALA LUMPUR, June 9 — IJM Corporation Bhd’s (IJM Corp) potential disposal of its plantation division to Kuala Lumpur Kepong Bhd (KLK) is timely amid the higher crude palm oil (CPO) valuation, and the proceeds could strengthen its balance sheet and build up its coffers for upcoming mega infra projects, according to MIDF Research.

(The potential disposal has been reported in the media without naming sources, but at this time of writing, no official announcement has been made to Bursa Malaysia. Trading in the securities of IJM Corp, IJM Plantations and KLK have been suspended since 2.30pm yesterday pending an announcement.)

The research house estimated that the IJM group could potentially reap sales proceeds of about RM1.3 billion, assuming the full disposal of its 56.2 per cent stake in IJM Plantations in an all-cash deal, which MIDF Research viewed as the likely mode of settlement.

“We are of the view that the group’s potential disposal of IJM Plantations is at an opportune time, capitalising on the CPO upcycle to fetch a higher valuation as well as an opportunity to strengthen its balance sheet and boost its war chest.

“This enables the group to be a more competitive bidder in larger construction and infrastructure projects as the private finance initiative (PFI) model is being increasingly explored by the Malaysian government moving forward, in which the contractor is expected to have a strong balance sheet,” it said in a note today.

Media reports speculated that KLK would take over IJM Plantations via a cash offer or share swap with a valuation of between RM2.50-RM2.70 per share, which MIDF deemed as fair, as it would be in line with its fair value of RM2.62.

Trading of IJM Corp, alongside with IJM Plantations (Buy; Target price: RM2.62) and KLK (Buy; Target price: RM27.01), had been suspended pending a material announcement which could be announced today, MIDF Research said.

Meanwhile, the research house said IJM Corp could significantly improve its net gearing (following the disposal) to about 0.31 times from 0.44 times, assuming the entire sales proceeds were allocated to pare down debts.

In addition, MIDF Research said, the disposal of its entire plantation division could provide the group with a more stable earnings outlook in the long run, as the persistently higher cost of production versus its plantation peers rendered the earnings contribution to be easily susceptible to the fluctuation in CPO prices.

It noted that the plantation division had been in a loss-making position in the financial years ended March 31, 2019 and 2020 (FY19 and FY20) while revenue contribution stayed rather stable at about 11-12 per cent of the group’s total revenue.

“We are maintaining our earnings forecasts at this juncture, pending more details from the announcement. Nonetheless, based on the potential full disposal, we estimate that IJM Corp’s earnings for FY22 and FY23 would be trimmed by about -4.8 per cent and -10.9 per cent respectively, partially mitigated by potential savings in finance costs of approximately RM39 million per annum.

“In spite of that, we believe that it is an opportunistic disposal to beef up its balance sheet and furnish the group with a more stable earnings prospects. Therefore, we are looking at attaching a more premium valuation for the group should this materialise,” it said.

MIDF Research maintained a “buy” on IJM Corp with a target price of RM2.12, based on pegging the group’s FY22 earnings per share to an unchanged price-to-earnings ratio of 17.7 times.

It also remained optimistic of the group’s earnings recovery momentum, premised on the prompt resumption of construction and business activities.

“This is underpinned by the group’s sizeable outstanding order book of RM4 billion with an earnings visibility over the next three to four years as well as unbilled property sales of RM1.4 billion,” it said. — Bernama

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