MARC has affirmed the ratings of MARC-1/AA- on IJM Corporation Berhad’s (IJM) RM1.0 billion Commercial Paper/Medium-Term Notes Programme (CP/MTN). The outlook on the long-term rating is revised to stable from negative.

The outlook revision is premised on IJM’s improved balance sheet position and positive business prospects arising primarily from a sharp increase in construction order book. Moreover, its credit metrics have been restored to levels which commensurate with its rating band. Upon conclusion of asset disposals undertaken by IJM during the year under review, its overall liquidity profile has strengthened and its working capital funding requirements for key projects has been adequately addressed. The affirmed ratings incorporate the group’s diversified business profile with strong market positions in key segments and its long operating track record.

As at end-December 2015 (9MFY2016), the group’s outstanding construction order book stood at RM7.6 billion, mainly supported by the RM4.0 billion construction contract for the West Coast Expressway (WCE) and the RM1.1 billion contract for the New Deep Water Terminal at Kuantan Port. The construction order book has improved its future earnings visibility up to four years until FY2020. However, during the period under review, the group recorded weaker performance under its plantation and property segments.

The plantation division’s performance was affected by lower average Malaysian and Indonesian crude palm oil (CPO) prices which declined by 8.2% y-o-y and 12.9% y-o-y to RM2,115/MT and RM1,860/MT respectively at end-9MFY2016. The division’s profit before tax declined to RM47.2 million from RM104.2 million. In addition to the weak CPO prices and sales volume, IJM’s Indonesian plantation operations were also affected by foreign currency translation loss of RM16.3 million on its US dollar-denominated borrowings. Since then, however, CPO price has increased to an average of RM2,421/MT in 1Q2016, which is expected to improve IJM’s plantation division’s full year earnings.

MARC notes that the weaker take-up rates for several of IJM’s property projects in FY2015, particularly in the high-end developments, have continued into 9MFY2016. The slowdown in the domestic property sector is reflected by the property division’s increase in inventories, which stood at RM609.5 million as at end-December 2015 (FY2015: RM425.9 million). While a protracted property market slowdown would affect the division’s performance, its unbilled sales of RM1.9 billion as at end-December 2015 provides earning visibility over the medium term.

IJM registered pre-tax profit of RM1,021.0 million on revenue of RM4.0 billion for 9MFY2016 (9MFY2015: RM774.7 million; RM4.0 billion). The higher profit was largely attributable to the disposal of 74% equity interest in Jaipur Mahua Tollway Private Limited and 70% equity interest in Swarna Tollway Private Limited for RM218.3 million and RM441.1 million respectively. The group’s gross and net debt-to-equity (DE) ratios remained flat at 0.60 times and 0.42 times following the slight reduction of borrowings to RM6.1 billion (FY2015: RM6.2 billion) at end-9MFY2016.

IJM’s recent disposals of the two Indian tollways have strengthened its liquidity profile. In addition, the privatisation of its subsidiary, IJM Land Berhad has provided IJM with better access to sizeable cash of about RM823.9 million held by the subsidiary, in which IJM had a 64.2% stake prior to the corporate exercise. The group has been able to maintain its operating cash flow (CFO) at a satisfactory level of RM698.4 million for 9MFY2016 due to a reduction in its working capital requirements. The CFO interest coverage ratio at the consolidated level stood at 3.38 times at end-9MFY2016 (FY2015: 1.89 times). The rating agency notes that the group has refinanced some of its borrowings with longer tenures to improve its debt profile and maintain its strong financial flexibility; its cash balance and unutilised credit lines stood at RM2.0 billion and RM3.93 billion as at end-December 2015.

At the holding company level, adjusted CFO was dominated by dividend income in FY2015 and was largely supported by the property, construction and infrastructure divisions. The CFO interest cover at the holding company level remained strong at 3.49 times in FY2015 which is higher than the five-year average of about 3.06 times.

The stable outlook on the ratings reflects MARC’s expectation that IJM’s credit metrics would remain supportive of its ratings over the near term. However, if the current challenging operating environment were to deteriorate to a level which will exert pressure on IJM’s ratings, MARC shall review the ratings and/or the rating outlook.

Contacts:
Cheah Wan Kin, +603-2082 2232/ wankin@marc.com.my;
Saifuruddin Othman, +603-2082 2245/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.