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Thursday, September 24, 2009

HWangDBS Raising IJM Corp Target Price To RM8.70

Revival from private sector a bonus
-Highest probability of replenishing orderbook
-Revival from private sector, stronghold of IJM
-BUY, raising PT to RM8.70 (ex-bonus RM6.00), based on SOP

Highest odds for new orders. Of the 3 larger contractors, we are most confident of IJM replenishing its order book given its modus operandi of bidding for a large pool of contracts with a fair mix of local, foreign, public and private sector jobs. Its recent RM327m contract win in India brings YTD contract wins to RM1.3bn. This makes it less reliant on the mega projects where timing is more uncertain. IJM’s orderbook of RM4.3bn (ex-Besraya) is evenly distributed locally and overseas. Locally, IJM has more than 50 on-going jobs.

RM2bn new order win forecast a done deal. Since providing this forecast, IJM has already clinched RM0.8bn in new orders, leaving just another RM1.2bn until FY10. We understand most of the contracts being negotiated are relatively secure and are going through the required formalities before coming to fruition. We suspect these contracts are for a RM700m hospital in Putrajaya, balance RM600m balance works for Al-Reem Island and RM649m Besraya contract. There is room for surprises as the guidance excludes potential wins from the 3 mega projects.

Revival from private sector. IJM is seeing some revival from private sector jobs from both the commercial and residential side. IJM is the strongest beneficiary from this as it has built a reputation in building Grade A office buildings while it was also the main contractor for luxurious KLCC condos such as Binjai, Troika, Park Seven and more recently, the Grand Hyatt Hotel.
Our top pick, raising PT to RM8.70. IJM remains our preferred proxy for the sector for its cheaper valuations, diversified expertise and resilient earnings.

We raise PT to RM8.70 based on SOP value. 45% of our SOP value (construction and manufacturing) is exposed to the pump
priming story. We advise investors to subscribe for its renounceable warrants issue as the warrants are currently in the money.

Market Focus By HwangDBS

Targeting growth while holding deficit
Against the backdrop of an economy gradually recovering from the impact of the global recession, it will be a delicate task for the Prime Minister to try to steer the economy towards robust economic growth while keeping the lid on a ballooning fiscal deficit. Indeed, fiscal deficit for the current financial year is expected to register 8.5% of nominal GDP as a result of the government's pumppriming measures (including the two stimulus package worth RM67bn) and lower tax revenues due to the recession. Recent rhetoric from the policymakers is that the government is determined to narrow the fiscal deficit in FY2010.

Yet, maintaining the current support for the domestic economy amidst a subdued and uneven recovery as well as ensuring longer term growth is just as important. As such, we believe the government will embark on a "belt tightening" exercise with reduction made on operating expenses rather than on development expenditure.

Likewise, overall spending is also more likely to be targeted to address some of the pockets of weaknesses currently in the economy. Efforts will also be made to enhance the longer term competitiveness of the economy (such as investment in education and training) as well as to promote new growth sectors. With that, fiscal deficit for 2010 is expected to remain high, albeit at a comparatively lower level of 6.8% of nominal GDP.

In our opinion, there is a possibility of small incremental corporate tax cut in line with the longer term objective to attract foreign investment. However, we think chances of individual tax cuts are low. The introduction of Goods and Services Tax (GST), which will broaden the tax base, is also unlikely next year given the economy is just recovering and preparations for implementation required. But this budget could provide a timeframe for GST implementation in the future. In terms of GDP, we expect a contraction of 2.9% in 2009 with the manufacturing sector still in contraction mode. For 2010, we forecast 4.5% growth driven by improvement in all sectors and a big swing in manufacturing.

As part of the country’s longer term growth strategy, we also look for incentives/measures to stimulate investments in R&D, education and training. This will help upgrade our manufacturing capabilities and drive growth in selected services and sectors where we can achieve leadership such as Islamic banking/securities business. Potential beneficiaries
here would include CIMB, AMMB, Maybank (Hold; TP:RM7.00).

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