IJM Corporation Bhd - 2013

MARC has affirmed its MARC-1/AA- ratings on IJM Corporation Berhad’s (IJM) Commercial Paper/Medium Term Notes Programme (CP/MTN) with a stable outlook. Outstanding notes under the programme comprise RM300.0 million CP and RM450.0 million MTN.

The affirmed ratings incorporate IJM group’s moderate business and credit risk profiles arising from its fairly diverse business segments, namely construction, property, plantation, industrials and infrastructure, in which the group has maintained adequate market positions and continued to register mostly satisfactory financial performance. The rating also considers the steady dividend income at the holding company level as well as its adequate financial flexibility. These factors notwithstanding, the group’s performance remains susceptible to the cyclicality of the plantation, construction and property sectors as well as to shifts in government policies in these sectors. In addition, the rating agency notes that borrowings at both the group and company levels have continued to rise and could increase further under the RM3.0 billion new financing facility the group has secured. MARC views IJM’s present leverage position to be commensurate with the current rating, but any sharp increase in debt levels could weaken its debt protection metrics.    

IJM’s construction and property divisions registered strong performances for the financial year ended March 31, 2013 (FY2013), resulting in improved revenue and earnings of RM4.7 billion and RM835.8 million respectively (FY2012: RM4.5 billion; RM801.6 million). The construction division benefited from completion of construction projects as well as write-backs during the year while the property segment achieved strong sales performance on the back of the strong buying trend in 2012. MARC also notes that after several years of declining trend, IJM’s construction order book has turned around on the back of government-directed construction projects, including significant construction contracts for the MRT project. As at end-November 2013, the construction order book stood at RM2.4 billion (end-June 2012: RM3.7 billion) and is anticipated to increase significantly upon the expected award of several packages of the RM5.9 billion West Coast Highway project.

MARC observes that IJM’s property division has sizeable unbilled sales of RM2.2 billion as at September 30, 2013 (end-June 2012: RM1.3 billion) that should provide earnings visibility in the near term. While the recent imposition of anti-speculation regulations on the property sector has dented market sentiments, IJM’s fairly diverse property projects, both in terms of geography and segments, may offer a buffer against these measures. The group plans to launch projects with a total gross development value (GDV) of RM2.5 billion in 2014; its recently launched 254-unit apartment project in London with GDV of RM1.0 billion has achieved a take-up rate of 86% as at end-September 2013.

The plantation division’s financial performance declined sharply due to weak crude palm oil (CPO) prices in FY2013; the average CPO price of RM2,620/MT was about 14% lower in FY2013 than the RM3,049/MT in the previous corresponding period. Additionally, the division was weighed down by high fixed costs arising from cultivation activities on its plantation land in Indonesia. MARC, however, takes comfort from the strong operating performance of its plantation business as reflected by the above industry average production levels.

The group registered fairly stable profitability in its industrial division, in which the manufacture of building materials is a major activity; and infrastructure division, through which the group is mainly involved in nine tolled road operations (Malaysia (3); India (5); Argentina (1)) and port operations. Of its two domestic ports, IJM has sold off its port and land assets in Kemaman for RM240 million and has completed 38% of the planned 40% divestment of its stake in Kuantan port to a China-based port operator for RM334.4 million. MARC understands the divestment proceeds will be utilised to fund the group’s expansion plans for Kuantan Port, including the construction of a new deep water terminal, amounting to about RM1.5 billion for the first phase. 
 
MARC notes that group borrowings have increased by 13.2% to RM5.7 billion in 9MFY2014 from RM5.0 billion as at end-FY2013, translating into a debt-to-equity (DE) ratio of 0.70 times (FY2013: 0.69 times), although net debt leverage stood at 0.50 times. The group may draw down on the RM3.0 billion new debt facility to fund its port expansion plans and other working capital requirements as well as to meet its debt maturities. Upon full drawdown and assuming part of the proceeds are utilised to refinance its entire short-term obligations, net group DE would increase to 0.62 times.
 
MARC observes that at the holding company level, dividend income has remained fairly steady, registering RM146.3 million in FY2013 (FY2012: RM143.6 million) despite the weaker performance of the plantation division.  In the absence of large construction activities undertaken at the holding company level, working capital has declined, translating to improved cash flow from operations (CFO) of RM127.9 million (FY2012: RM111.3 million). CFO interest cover was therefore higher, albeit at a moderate 2.58 times (FY2012: 2.20 times), despite the slight increase in finance costs on increased borrowings. Nonetheless, free cash flow (FCF) was negative due mainly to a sizeable dividend pay out. As at end-December 2013, IJM has an undrawn RM250 million under the RM1.0 billion rated CP/MTN programme.

The stable rating outlook is premised on MARC’s expectation that the group’s current operating performance would translate to adequate credit protection measures.

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