CLSA: 17 mar IJM (underperform)

Uncertainties abound
We downgrade our call on IJM to U-PF from O-PF and cut our target price to RM5.00 from RM8.60. Implementation of construction and property projects could be delayed due to the changes in state governments where these projects are located. IJM also faces profit margin risk due to rise in material prices as most of its projects have no cost pass through clauses. We cut our core EPS forecasts by 2-11% for FY08-09CL to reflect the lower profit margin and slower implementation of the West Coast Expressway (WCE) project.

Risk of project delays
The launch of IJM’s WCE project could be delayed due to the change in state governments of Perak and Selangor, where the projects are located. The opposition parties have taken over the administration of the Selangor and Perak state governments, which each own a 20% stake in the WCE project. The opposition leaders have said they will review the projects within the state, which could cause delays, but gave the assurance that they will be probusiness and investments.

Cost pressures intensifying
We cut our construction average profit margin assumption to 7-8% from 9% for its existing construction projects to reflect rising material costs. Coupled with the delay in recognition of earnings for its WCE project to FY10CL, we cut our core EPS forecasts by 10-11% for FY08-09CL and 2% for FY10CL. The impact is partly offset by the new highway project in India and building project in Pakistan that replenishes its orderbook by RM0.9bn to RM6bn.

Slower property launches
Most of IJM’s domestic projects are located in opposition-led states such as
the Canal City and Jelutong projects. Building plans for the Jelutong project has been approved and is expected to be launched in June/July. But sales may be affected by the easing demand for residential properties.

Downgrade to U-PF
We downgrade IJM to U-PF from O-PF due to project implementation and profit margin risks. We cut our RNAV to RM7.10 from RM8.60 to reflect the increase in net debt for its overseas expansion and lower valuation for its construction and property divisions (cut by 1x PE multiple to 12x and 10x respectively). Applying a 30% discount to RNAV for heightened risks, we cut our target price to RM5.00.