IJM Corp - Kuantan Port to Get Bigger

Highlights

We returned, on a POSITIVE note, from our recent visit to Kuantan Port and the surrounding Gebeng Industrial Estate. Below are the visit highlights:
Background… Kuantan Port which spans over 650ha has 22 berths with a total berth length of ~4km and maximum depth of ~11m. It can cater for a maximum vessel capacity of 53k ton (see Figure #1). The robust activities in the port are supported by various industries, mainly in Gebeng, ranging from palm oil to petrochemical products.
Iron growth… The port is fully utilised with a cargo throughput of 17m fwt and its growth has been mainly supported by the export of iron ore. As of FYE Mar-13, iron ore exports made up 1/3 of its revenue. In terms of earnings contribution, the port posted PAT of RM79.8m, which makes up ~20% of IJM’s FY13 core earnings.
Roping in China… As part of the G2G negotiations to attract investments from China into the East Coast Economic Region, IJM will dispose its 40% stake in Kuantan Port to Guangxi Beibu Gulf International Port Group Co Ltd for RM334.4m (kindly refer to our report “Kuantan expansion becomes a reality” dated 10 Sep-13). In return, the Chinese party will bring in investors to setup industrial plants in the new Malaysia-China Kuantan Industrial Park (MCKIP). The port’s concession which will end in 2027 will also be extended by another 60 years to at least 2072.
Expansion plans… To cater for the imminent demand from MCKIP, Kuantan Port will build a new deep water terminal with 2km berthing space and depth of 18m. The port expansion will be developed over 2 phases, with phase one the first km of new berthing space. The Government is currently constructing a 4.6km new breakwater, and Phase 1’s construction cost of RM1bn is expected to benefit IJM’s construction division. A timely boost to replenish its current order book of RM1.9bn (1.2x FY13 construction revenue).
Transhipment goal… With the expanded capacity, Kuantan Port seeks to increase its transhipment business especially for cargoes towards the North East Asia route, particularly China.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; Unexpected downturn in the construction, property and plantation cycle; and Sharp fluctuation in forex.

Forecasts

Unchanged.

Rating

BUY
Positives: (1) Higher upwards price sensitivity towards new contract wins; (2) Strategic shareholding in WCE and Kuantan Port to clinch projects; (3) Recovery in construction margin; (4) Robust contribution from IJM Land; (5) FFB growth to mitigate weak CPO prices.
Negatives: (1) Delays in securing sizable contracts; (2) Continued deterioration in CPO prices; (3) Slower than expected take-up rates for its property launches.

Valuation

TP maintained at RM6.32 based on SOP valuation.
Source: Hong Leong Investment Bank Research - 18 Nov 2013