Wednesday August 8, 2012
IJM upgraded on property upside
Target Price: RM5.74
WE are upgrading our recommendation on IJM from a “market perform” to an “outperform”.
Our upgrade is mainly premised on our in-house upgrade of IJMLand's target price coupled with its still ample upside (+12%) from the current share price.
Following the recent news on the Selangor water issues, we understand that IJM's joint venture (JV) project for the Pahang-Selangor Water Transfer Project (PSWT) is currently progressing well at above a 50% completion rate with the project financing, with Japan Bank for International Cooperation (JBIC), still intact. The management is in discussion with the Government to revive the NPE extension project with a new alignment, although the outcome is not likely to be decided in the near term.
Its associate, Kumpulan Europlus (KEURO) is expected to make the announcement on the finalisation of the West Coast Expressway (WCE) concession in the near term.
There are no material changes in our forecasts at this juncture, but we have increased our target price higher from RM5.56 to RM5.74 (+3%) following our upward revision on IJMLand's revised net asset value (RNAV) for its property project in the United Kingdom.
We understand that there are concerns on the funding of the on-going PSWT project due to the fiasco in the Selangor water industry. To recap, a consortium led by Shimizu was awarded a RM1.3bil tunnelling (45km) contract for the PSWT project at the Pahang site.
IJM holds a 20% stake in the consortium together with UEM Builders (20%), Nishimatsu (30%) and Shimizu (30%). The project is slated for completion by late 2014 and management reiterated that JBIC is still financing the project.
We understand that the management is currently meeting with the Government to refresh the alignment of the proposed NPE highway extension project.
In our view, this could be due to the feasibility of the project and the competition with the existing Besraya Expressway.
Nonetheless, we do not expect the outcome to be out in the near term as the discussion could be prolonged due to land acquisition and final agreement on the concession terms.
In the meantime, the management expects its associate KEURO to announce the update on the signing of the concession agreement for the WCE highway project.
In a nutshell, IJMCorp will likely be running at its full capacity after securing the WCE highway construction works. Its current order book now stands at about RM1.7bil for the next two to three years.
We opine that its earnings visibility is fairly clear at this juncture while the potential WCE highway construction project will provide an additional three years' earnings visibility to the group.
Risks involved would be the cancellation of the WCE project, a spike-up in material prices, a sharp decrease in CPO prices below RM3100 per metric tonne and slower take-ups for its property projects.
There are no material changes to our forecasts at this juncture even with IJMLand's recent venture into the UK property market.
We have already factored in new contracts worth RM6bil for FY13, which will be mainly driven by the construction of the WCE highway (RM4bil to RM4.5bil).
Target price: RM4.10
GAMUDA's robust RM5.5bil outstanding construction order book and RM1.3bil in unbilled property sales should translate into record profits in both financial year ending July 31, (FY12) and FY13.
The stock remains a buy on undemanding valuations of just 11.5 times 12 months forward earnings. Our RM4.10 revised net asset value (RNAV)-based target price meanwhile offers 19% upside.
Major construction job flows expected next year, post 13th general election, would be the next share price catalyst.
Meanwhile, its net dividend yield of 3.6% justifies building a medium-term position in this stock, in our view.
Gamuda is on track to post record earnings in FY12, after delivering net profit of RM407mil for the nine months ended April 30 (+36% year-on-year).
Growth will be underpinned by an uptick in construction margins as the northern portion of the double-track rail project progresses beyond the 80% completion mark.
Record property sales of RM1.3bil in FY11 and RM1.5bil in eleven months of FY12, as well as rising traffic volumes and water offtake, should grow its property and concession earnings.
Concession earnings should continue to contribute the bulk of pretax profit in FY12 at 38% (property: 36%, construction: 26%).
We maintain our forecasts, which imply FY12 net profit growth of 26% (FY13: 11%). The year 2013 may turn out to be another interesting year, as we expect major construction awards to resume post the 13th general election.
Gamuda continues to eye the final link of the double-track rail project (Gemas-Johor Baru) worth RM8bil, and the Klang Valley's MRT2 and MRT3, expected to be opened for tender after federal government's approval in mid-2013.
We estimate that the MRT2-3 package is worth a total of at least RM30bil.
Gamuda's valuations have become attractive, with the stock trading close to its one standard deviation below its mean price-to-earnings ratio of 10.8 times amid good earnings visibility from a strong outstanding construction order book, record unbilled property sales and recurring earnings from its toll and water concessions.
Despite these positives, however, its share price may be capped in the near term by 13th general election uncertainties.
In addition, there could downside risks for construction-related stocks generally post the 13th general election, depending on the outcome.
Target price: RM1.42
WE raise our forecasts and dividend discount model-based target price for higher-than-expected turnover rent and advertising income.
The stock remains an outperform as it could be catalysed by higher-than-expected rental reversion for 67% of Pavilion Mall's net lettable area (NLA) next year.
The financial year 2013 (FY2013) yield of 5.4% is an attraction in volatile market conditions.
First half revenue was driven by higher turnover rent (up from 3%-4% of total revenue to 5%) as well as higher advertising income. Pavilion REIT declared a second interim dividend per unit (DPU) of 1.7 sen in the second quarter (Q2), bringing year-to-date DPU to 3.4 sen, above our forecast of 3.1 sen.
As such, we raised our FY2012 DPU forecast from 6.2 sen to 6.7 sen. Rental reversion for the Pavilion KL mall was a healthy 8%. It has already renewed 60% of this year's expiring leases (19% of NLA).
Visitor traffic improved 3%-4% from the 31 million visitors in 2011. Sales by Pavilion KL mall's tenants rose by 4% in the first five months of the year.
The mall is currently 95% occupied following Tangs's departure but will go back to 99.5% occupancy after Fashion Avenue comes into the picture.
Fashion Avenue in Pavilion Mall is on track for a soft opening this week. The official opening is slated for the first week of September when 90% of tenants will move in.
The space vacated by Tangs is being converted into a high-street fashion precinct called “Fashion Avenue”, comprising 35 designer brands on levels two and three of the mall.
Fashion Avenue should generate considerable shopper traffic and buzz as 30% of these 35 designer brands will be totally new to the country.
Fashion Avenue will be targeting those in their 20s and 30s.
Shoppers can access the fashion precinct via a new drop-off area that is dedicated to Fashion Avenue at Jalan Raja Chulan, improving its accessibility.
We expect Q2 and early Q3 to be weaker in the absence of rental contribution from the 68,000 sq ft of retail space in Pavilion Mall that Tangs occupied until end-March.
Management expects 67% return on investment from its RM13.5mil capital expenditure for Fashion Avenue and expects to at least double the rental rates after the renovation. Although the 68k sq ft will be closed for four and a half months from late Mar until early Aug, the subsequent doubling of rental rates will offset the downtime. The full-year impact of this move will be felt in FY2013.
Pavilion Extension is one of the three properties for which the REIT manager has secured the right of first refusal (ROFR). According to management, piling works is on track to start by the end of this quarter.
The area has already been cordoned off and a platform for the public to walk on is being constructed.
Faherenheit 88, another property to which Pavilion has ROFR, will be undergoing its first cycle of rental renewals in Q1'2013, a development which management will be keeping a close watch on.
Piling works have already started for USJ mall. Besides the ROFR to these three properties, Pavilion is also looking at acquisition opportunities in Peninsular and East Malaysia.
We believe that Pavilion Mall is in an early stage of its rental reversion cycle as it was opened in September 2007. In its first cycle of rental reversions in 2010, it had raised rental rates by 8%-12.5%.
We expect similar strength during its next major rental review in September 2013 when 67% of the mall's NLA comes up for renewal.