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Investment Research

Company Report

IJM Land Berhad

Date: 28 August 2012

Low sales growth a concern

Despite the property upcyle in the last few years, and in contrast to its peers, IJMLD failed to capitalise on the positive sentiments and consequently sales growth was erratic and subpar.

Neutral
Fair value Previous FV Share price Yield Capital gain Total return Conviction Stock code Market cap RM2.50 N/A RM2.41 +1.7% +4 % +6% Average IJMLD MK RM3,377m

Furthermore, there does not appear to be any imminent positive catalysts ahead. On the contrary, there are more potential negative catalysts as IJMLD product pricing is still high and we believe the overall property sector is now at precipice of a downcycle as property prices are now overstretched. As such, we believe IJMLD will find it difficult to achieve any significant sales growth moving forward.
Based on RNAV, we derived a fair value of RM2.50 for IJMLD. We have also assigned an Average conviction rating to IJMLD. Overall, we have a NEUTRAL on IJMLD.

Robin HU
robin@nonameresearch.com

nonameresearch.com | 28 August 2012

Mediocre Performance Despite Tailwind

Disappointingly flat revenue even in good times
*Please note that IJMLD financial year end is in March. This means of IJMLD performance in a particular financial year really reflects events in the previous calendar year. In other words, FY2012 was driven by events in calendar year 2011 since 9 months of FY2012 resides in 2011. Lethargic sales. The Malaysian property market was on an overall uptrend from 2009-2011. 2010 and 2011 were the best years for property sales in recent memory yet despite the property upswing, IJMLD performance has been mediocre. Revenue grew by only 6% to RM1.16bn in FY2011 (calendar year 2010) and 4% to RM1.2bn in FY2012 (calendar year 2011). Similarly, sales grew 16% to RM1.46bn in FY2011 but curiously declined 8% to RM1.35bn in FY2012.
Figure 1: IJMLD revenue, net income and sales FY2010-FY2012

Source: IJMLD

In comparison, IJMLD peers managed to increase sales significantly during the same period. MSGB grew sales by 100% and 50% respectively in those two years while SPSB grew sales by 40% in each of those two years.
Table 1: Comparative sales growth 2010-2011 2010 IJMLD MSGB SPSB +16% +100% +40% 2011 -8% +50% +40%

But helped by GP margin expansion. Net income expanded by 100% to RM108m in FY2011 before contracting 11% to RM194m in FY2010. However, after adjusting for the one-off gain on disposal in FY2011 of RM63m, net income actually grew 43% and 25% in FY2011 and FY2012 respectively. The driver for net income growth was margin expansion as GP margin expanded from 24% in FY2010 to 33% in FY2011.

nonameresearch.com | 28 August 2012

Figure 2: IJMLD gross profit margin FY2010-FY2012

Need to translate into sales faster

Low asset turnover ratio. IJMLD need to translate its asset into sales faster. As can be seen from the table below, IJMLD has a much lower asset turnover ratio compared to its other pure play developer peers such SPSB and MSGB. IJMLD asset turnover ratio of 0.3x trails SPSB 0.5x and MSGB 0.7x. This means IJMLD uses its capital much less efficiently and that for the same amount of invested capital, MSGB generates twice as much profit.
Table 2: Comparative asset turnover ratio 2009 IJMLD MSGB SPSB 0.28 0.58 0.40 2010 0.27 0.72 0.44 2011 0.28 0.73 0.51

nonameresearch.com | 28 August 2012

Valuation and Conclusion

Valuation method and key assumption
Based on RNAV, we derived a fair value of RM2.50 for IJMLD. At current price of RM2.41, this represents a potential total return of 6% comprising 1.7% dividend yield and 4% capital gain. Some of our key assumptions are: Annual property sales to range between RM1bn-RM1.5bn with more downside than upside potential Sustainable EPS of 10 sen which is lower than FY2012 actual EPS of 14 sen

Key risks
Sales slowdown. IJMLD secured sales of RM1.35bn in FY2012 and plans to do better than FY2012 in FY2013 while declining to provide a sales target. Based on the launches to date, it appears that IJM is still launching units at the price range of RM500 psf and above (alternatively RM600,000 per unit). We believe such prices, fueled by speculative demand, are too high and would need to come down and thus will affect IJMLD sales and profitability. Broader property sector de-rating. We currently have a negative outlook for the property sector. In the last five years, particularly 2010 and 2011, the Malaysian property sector has seen a marked increase in property prices and transaction volume. In our view, this was driven not by fundamentals (e.g. increase in wage, population growth, increase in raw materials cost) but by short term reversible catalysts (e.g. property gain tax removal, tax breaks, artificially low interest rate, speculation). The average property price is now materially and clearly unaffordable to most Malaysians and a correction is overdue. Furthermore, we believe that the aforementioned short term catalysts (e.g. low interest rate) will soon reverse course and act as negative catalysts for an overall sector de-rating.

Conclusion
Despite the property upcyle in the last few years, and in contrast to its peers, IJMLD failed to capitalise on the positive sentiments and consequently sales growth was erratic and subpar. Furthermore, there does not appear to be any imminent positive catalysts ahead. On the contrary, there are more potential negative catalysts as IJMLD product pricing is still high and we believe the overall property sector is now at precipice of a downcycle as property prices are now overstretched. As such, we believe IJMLD will find it difficult to achieve any significant sales growth moving forward. Based on RNAV, we derived a fair value of RM2.50 for IJMLD. We have also assigned an Average conviction rating to IJMLD. Overall, we have a NEUTRAL on IJMLD.

nonameresearch.com | 28 August 2012

Historical Statistics
Revenue and Net Income (FYE-Mar) Payout Ratio (FYE-Mar)

Net Income Margin (FYE-Mar)

EPS and DPS (FYE-Mar)

Revenue and Net Income Growth (FYE-Mar)

Gross Profit Margin (FYE-Mar)

nonameresearch.com | 28 August 2012 Rating structure The rating structure consists of two main elements; fair value and conviction rating. The fair value reflects the security intrinsic value and is derived based on fundamental analysis. The conviction rating reflects uncertainty associated with the security fair value and is derived based on broad factors such as underlying business risks, contingent events and other variables. Both the fair value and conviction rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.