MARC has affirmed its MARC-1/AA- ratings on IJM Corporation Berhad’s (IJM) RM300 million Commercial Papers/Medium-Term Notes (CP/MTN) Programme. The ratings are premised on the group’s below-average business risk profile which is underpinned by strong market positions in construction and property development and its fairly diversified operations across industry segments and key markets which helps to balance the cyclicality that is inherent in many of its individual business segments. The ratings are moderated by the weaker near-term industry prospects for its construction and property divisions, an increase in the group’s debt leverage and capital expenditure outlays which continue to exceed operating cash flows. The ratings carry a stable outlook.

IJM is the holding company for the IJM Group whose principal activities are construction, property, industries, plantation and infrastructure. IJM is Malaysia’s second largest construction player and a strong regional player in India and the Middle East markets. Intra-group demand and sales in relation to its construction, property development, infrastructure and industries segments continue to provide the scope for synergies and economies of scale, with positive implications for overall profitability.

While the majority of IJM’s earnings continue to be derived from cyclical businesses, the benefits of diversification have been particularly visible in IJM’s operating performance over the 12 months ended March 31, 2009 (FY2009). Pre-tax profit for the construction segment plunged by 75.6% year-on-year due to higher construction and financing costs as well as reversal of profit recognised earlier. The plantation segment also saw a 16.1% reduction in pre-tax profit due to the fall in crude palm oil prices. The lower contributions by both segments were partly offset by higher pre-tax profits from the property and industries segment which contributed 23.7% and 32.3% of group pre-tax profit respectively. Owing to record sales of concrete piles, the industries division’s pre-tax profit grew 43.9% to RM171.0 million. Overall, IJM posted fairly strong results for FY2009 with revenues of RM4.60 billion, which was marginally lower than the preceding year’s revenue of RM4.64 billion. Its pre-tax profit was RM528.7 million compared to RM796.0 million in FY2008 (excluding RM940.8 million for goodwill impairment).

In the immediate term, IJM’s outstanding construction order book of RM4.2 billion, as at end FY2009, will provide earnings visibility through FY2010/2011 although margin pressure is expected to prevail. Revenue from the property division, meanwhile, will be supported by future expected billings from contracted sales of around RM700.0 million, as at end FY2009, in addition to new project launches in FY2010 valued at approximately RM750.0 million. The group’s continued expansion of its oil palm plantation acreage in Indonesia and the plantation profile of its oil palm estates, in particular its significant percentage of prime mature palms, suggests that the plantation business, which contributed 30.3% of group pre-tax profit in FY2009, would maintain its relative importance as an earnings contributor, going forward. The industries division especially now that Industrial Concrete Products Berhad is a wholly-owned subsidiary of IJM Group, which enjoys a strong position in the domestic concrete piles market together with meaningful contributions from the Chinese market, should continue to benefit from public infrastructure spending under the relevant authorities’ fiscal stimulus packages.

MARC believes that IJM’s recent significant capital investments and dividend payout in FY2009 signal an increase in its risk tolerance. Cash flow used in investing activities in FY2009 increased to RM452 million compared to RM115 million, the lower amount in FY2008 was attributable to total cash outflows being partially offset by significant cash inflows from asset disposals. As at March 31, 2009, the group had RM788 million in cash and cash equivalents (FY2008: RM627 million) after the payment of special interim dividends totalling RM160.6 million. The special interim dividends were declared subsequent to withdrawal of its earlier proposed capital repayment exercise which would have seen a considerably higher outflow of cash. IJM’s gearing as measured by its debt-to-equity ratio rose to 0.66 times as at end-March 2009 (FY2008: 0.58 times). Excluding IJM’s non-recourse toll concession debts, which are secured by the toll concessions’ own cash flows, its gearing would decline to 0.50 times (FY2008: 0.41 times). IJM’s ongoing capital expenditure programme will test the group’s commitment to maintain appropriate gearing levels, particularly under prevailing challenging operating conditions.

The stable outlook reflects MARC’s expectations that IJM will continue to grow its business prudently, taking into consideration the impact on its balance sheet and credit metrics.