MARC has assigned ratings of MARC-1/AA- to IJM Corporation Berhad’s (IJM) proposed RM1.0 billion Commercial Papers/Medium-Term Notes Programme. Concurrently, MARC has affirmed IJM’s MARC-1/AA- ratings on its existing RM300 million Commercial Papers/Medium-Term Notes Programme. The ratings reflect the Group’s strong market positions in construction and property development and its diversified operations across industry segments and key markets, which help 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 in addition to the increased business risk and additional leverage resulting from the expansion of its oil palm plantations operations in Indonesia. The substantial capital spending requirements of IJM’s 55%-owned subsidiary, IJM Plantations Berhad (IJMP) through 2014 could limit IJMP’s dividend capacity, while the additional leverage taken on by IJM to fund the take-up of its entitlement under IJMP’s rights issue will exert pressure on IJM’s credit metrics at holding company level. The stable rating outlook is supported by IJM’s strong liquidity position and good financial flexibility, and incorporates MARC’s expectations that IJM will continue to prudently manage its financial profile.

The proceeds from the new programme will be used to finance IJM’s subscription of its subsidiary IJMP’s proposed renounceable rights issue with free warrants, subscription to its 50%-owned Lebuhraya Kajang-Seremban Sdn Bhd’s (LEKAS) Redeemable Convertible Unsecured Loan Stocks and refinancing of existing borrowings. Assuming an initial drawdown of RM500 million from the new programme, this would raise its net debt-to-equity (DE) ratio to 0.65 times (FY2009: 0.59 times) against its covenanted net DE ratio of 1.25 times, and correspondingly IJM’s CFO interest coverage is expected to decline to 2.0 times (FY2009: 2.5 times).

The proceeds from the drawdown and subsequent subscription of IJMP’s renounceable rights issue with free warrants will be used to fund its plantation development in Indonesia. IJMP has projected a total capital expenditure of RM602 million over the next five years until 2014 to develop approximately 33,687 hectares (ha) of land, including the construction of three palm oil mills in Indonesia. No revenue is expected from this investment in the near term, although it is eventually projected to double IJMP’s estate size from its current cultivated area of 25,249 ha in Malaysia. In the longer term, IJMP’s expansion plans should positively impact revenue and consolidated operating margins, notwithstanding its exposure to cyclical palm oil prices.

Since MARC’s last rating action on IJM in June, 2009, the Group has announced its succession plan for the Group’s CEO and Managing Director. By end-2010, IJM’s Deputy CEO and Deputy Managing Director, Teh Kean Ming, who has been with the Group since 1989 in various capacities, will assume the role of Group CEO and Managing Director in place of Dato’ Krishnan Tan, who will continue as a member of the IJM Board of Directors. MARC believes that there will be no immediate rating implications arising from the orderly succession plan.

IJM is the holding company for the IJM Group, which principal activities are construction, property, industry, 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 industry segments continue to provide the scope for synergies and economies of scale, with positive implications for overall profitability.

Contacts: 
Francis Xaviour Joe 03-20902279/fxjoe@marc.com.my;
Jason Kok 03-20902258/ jason@marc.com.my