MARC has affirmed its MARC-1/AA- ratings on IJM Corporation Berhad's (IJM) RM1,000 million Commercial Paper/Medium Term Notes Programme with a stable outlook based on IJM's relatively resilient consolidated performance in a challenging economic environment and the rating agency's expectation that industry conditions and operating results will support improvements in IJM's current financial risk profile. However, MARC is of the view that the increase in the operating holding company’s debt to fund a combination of investments and advances to subsidiaries and higher working capital requirements are exerting some pressure on IJM’s credit profile given the continuing negative net cash flow from operations (CFO) at IJM company-level and lower dividends upstreamed from subsidiaries.

MARC sees no immediate impact on IJM’s ratings from the recently announced proposed merger between 62.5%-owned IJM Land Berhad (IJML) and Malaysian Resources Corporation Berhad (MRCB). The transaction, if completed, will create one of the largest listed property groups in the country. However, given the lack of details, the resulting impact of the merger on IJM’s consolidated financial profile and company-level credit metrics cannot be ascertained at this time. The proposed merger also remains subject to approval from a number of parties, including the respective shareholders of IJML and MRCB as well as the authorities.

IJM's ratings continue to incorporate the moderate diversity in earnings generated by the group's five core business segments of construction, property, plantation, industrial manufacturing and infrastructure as well as the relative stability in its consolidated financial performance. IJM is an operating holding company with a leading position in the domestic construction sector. IJM's property development, industrial manufacturing and plantation segments contributed 79% and 87% of consolidated segment operating profit before tax for the 12 months ended March 31, 2010 (FY2010) financial year and FY2009, respectively. The group's consolidated performance in recent financial years has benefited from the resilient performance and consistent profitability of these three segments which collectively posted RM458 million of operating profit before tax in FY2010 (FY2009: RM457 million). IJM's other segments have fared less well. The operating performance of IJM's construction segment was lacklustre in FY2010 as well as the prior year on account of declining revenues and narrow margins.

IJM's infrastructure segment remained profitable overall; however, its FY2010 performance was buoyed upward mainly by foreign exchange gains rather than sustainable gains in operating profitability. Of its nine toll concessions, five are in India, of which three remain in the initial traffic ramp-up phase. IJM's India toll road operations posted an adjusted pre-tax segment loss of RM22.4 million on excluding foreign exchange gains in FY2010. Apart from traffic volume risks, the India toll road projects have also experienced significant cost pressures which have negatively impacted total project costs and resulted in higher toll road operating cost profiles. Meanwhile, the substantial debt burden of IJM's toll road concession segment relative to its current earnings generation continues to weigh on the group's consolidated financial risk profile.

For the six months ended September 30, 2010 (1HFY2011), the group’s pre-tax profit rose by 48.2% to RM377 million from 1HFY2010 despite a fall in revenue by 19.9% during the same period. The improved pre-tax profit is driven by higher crude palm oil prices and foreign exchange translation gain recorded by its infrastructure division. MARC expects IJM's plantation segment to maintain its earnings momentum over the next several quarters on the back of strong crude palm oil price trend. Moderate earnings visibility is also afforded by the group's outstanding order book positions of its construction and industrial manufacturing segments and contracted property sales. MARC believes that continued earnings momentum at the group should have a positive effect on cash flow generation and the dividend upstreaming potential of IJM subsidiaries and associates.

IJM company-level cash flow and debt service coverage metrics have weakened considerably in recent years as a result of continuing net negative cash flow from operations (CFO) and increased company-level debt. Its debt service burden has also risen; interest paid increased to RM36.7 million in FY2010 from RM18.5 million in FY2009. Its total debt rose to RM966.4 million as at March 31, 2010 due to additional borrowings taken to fund its subscription of RM219.0 million of redeemable convertible unsecured loan stocks issued by a jointly-controlled entity and net advances to subsidiaries of RM406.4 million. There was no reversal of the continuing trend of negative CFO interest coverage in FY2010, in part due to subdued dividend income. IJM raised RM235.7 million through the sale of shares in subsidiaries during the year which alleviated the pressure on its balance sheet and liquidity somewhat.

MARC notes that IJM has also provided a corporate guarantee in respect of a subsidiary's RM250 million debt offering maturing in 2016. However, there are no near-term debt maturities that pose refinancing risk. IJM’s current liquidity position and financial flexibility remains satisfactory, as evidenced by RM117.0 million of deposits, cash and bank balances, and RM82.7 million of short-term investments as at March 31, 2010. Nonetheless, MARC opines that IJM's on-balance sheet debt of RM966.4 million and its contingent liabilities will have to be supported by increasing CFO and net cash flow from investing (CFI) over time for the operating holding company to maintain rating stability. The outlook and ratings on IJM could be revisited if company-level cash flow continues to fall short of operational liquidity needs and debt servicing requirements on a sustained basis. This could happen if dividends and interest received from subsidiaries remain subdued, and there is no repayment of advances to subsidiaries while debt levels remain flat or continue to rise during the current financial year.

Contacts:
Janey Chock, +603-2082 2264/ janey@marc.com.my;
Ahmad Gazzara Czillich, +603-2082 2259/ gazzara@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.