IJM Corporation Bhd - 2007

The long term rating of IJM Corporation Berhad’s (IJM) RM300.0 million Commercial Papers/Medium Term Notes Programme (CP/MTN) has been upgraded to AA- from A+ while its short term rating has been reaffirmed at MARC-1. The rating upgrade reflects the group’s strong operating financial performance, its enhanced financial profile following its merger with Road Builder (M) Holdings Bhd (RBH), and a geographically diversified revenue base which is supportive of continued earnings growth. The outlook on the ratings is stable. These positives are tempered by the intense competition within the construction industry, inherent cyclicality of the construction and property development businesses, and the effect of rising building material prices on margins.

Out of IJM’s six operating divisions, its construction, property development and manufacturing & quarrying divisions accounted for 87.6% (RM2.0 billion) of total revenue in FY2007 (84.7% for the 1H08 ended 30 September 2007). The merger with RBH, concluded in April 2007, has increased the scale of IJM’s construction, property development and infrastructure related activities and RBH contributed 19.8% (RM439.8 million) to the group’s revenue in 1H08. In the first six months of FY2008, all operating divisions were profitable.

IJM has a total current outstanding construction order book of more than RM5.0 billion of which, RM0.75 billion is contributed by RBH. It’s acquisition of a 25% stake in Kumpulan Europlus Berhad (KEB) provides access to the sizeable land bank of Talam Corporation Bhd, KEB’s associated company.

The focus of IJM’s property development activity continues to be in Penang, the Klang Valley and Johor, where the group maintains a strong competitive position. The group’s undeveloped land bank has increased to more than 10,000 acres with RBH contributing approximately 3,000 acres. The land bank has an estimated gross development value of RM25.0 billion.

The group’s plantation division is expected to contribute significantly to the group’s financial performance going forward. Its plantation hectarage has doubled to about 60,000 hectares recently following acquisitions  in  East Kalimantan, Indonesia. The group will be making its foray into the Indian plantation

sector, penetrating both upstream and downstream markets via a strategic alliance with the Godrej Group in India. The Godrej Group is well-known in India and owns oil palm plantations in the states of Karnataka and Goa.

For IJM’s financial year ended March 2007 (FY2007), revenue increased by 21% to RM2,311.2 million (FY2006: RM1,910.5 million) while profit before tax (PBT) increased by 13% to RM318.9 million (FY2006: RM281.5 million). PBT from the construction, manufacturing & quarrying and plantation divisions increased by 17%, 49% and 10% respectively. PBT contribution from the group’s property development division however decreased by 19% as a result of lower sales and a rise in construction costs. The infrastructure division largely represented by toll concessions recorded a loss of RM22.9 million in FY2007 (FY2006: RM14.2 million loss) due to low initial traffic volumes and high finance expenses. With the addition of RBH’s infrastructure assets, IJM’s infrastructure division registered RM17.2 million PBT in 1H08, which marks a turnaround from its loss in FY2007. The group’s net cash flow from operations (CFO) remained healthy at RM71.3 million (FY2006: RM226 million).

The stable outlook reflects MARC’s expectations of continued strong consolidated revenue and profit performance, sustained strong financial flexibility, healthy cash flow generation and moderate debt leverage. The outlook is also supported by the large order book of IJM’s construction business, the sales performance of its property development division and the consistent operating performance of its plantation division. The infrastructure division’s toll and port concessions, formerly under RBH will augments the group’s recurring earnings capacity.

Strengths

• Large and well-established construction player with significant presence abroad;
• Strong operating financial performance; and
• Diversified income streams through its plantation, manufacturing and quarrying operations and investments.

Challenges/Risks

• Integration challenges arising from its merger with Road Builder (M) Holdings Berhad (RBH); and
• Countering margin pressures from escalating construction material costs in the construction and property sectors.