IJM Corp (TRADING BUY) - O&G through Scomi

Proposed investment of up to 25.08% stake in Scomi Group Bhd for RM149.3m. The investment comprises of:

• RM39.3m for 119.1m new Scomi shares (RM0.33/share), representing 10% of the existing share capital; and
• RM110m 3-year redeemable convertible secured bonds which carries zero coupon payment (conversion price of RM0.365).

Scomi has RM200m MTN due for repayment this week and the perception of IJM as Scomi’s white knight has been viewed negatively by investors. That said, Scomi’s latest results have been showing a turnaround in performance after two consecutive years of losses. Moreover, Scomi has emerged as the frontrunner for the Tembikai and Cenang marginal fields worth RM620m to RM1.2bn each. Hence, this may prove to be a profitable investment going forward.

Although we are neutral on this development, we believe that the market has overreacted by wiping out ~RM497m of IJM’s market cap, exceeding ~3.3x its investment outlay of ~RM149.3m. Hence, we are maintaining our TRADING BUY call on the company with a TP of RM5.48 in view of the potential technical rebound, while further clarification from the analyst briefing later today may recover some positive sentiment for the stock.