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Marc Djandji, CFA is the Editor-in-Chief of The ASEAN Insider, a subscription-based monthly investment newsletter committed to finding compelling investments backed by powerful structural trends in Southeast Asia. He is also a co-Founder and Partner of ASEAN Strategy Group Ltd., an independent... More
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  • IJM Land Offers Robust Growth At Undemanding Valuation  0 comments
    Mar 21, 2013 5:49 AM

    By Marc Djandji, CFA

    The Malaysian property market has witnessed robust growth across subsectors on the back of strong economic growth, competitive interest rates, credit availability, government supportive policies, and foreign influx.

    Long term prospects for real estate seems compelling and growth is expected to continue, driven largely by factors that include the projects under ETP (Economic Transformation Programs), the High Speed Rail Link (HSRL) between Singapore and KL, the MRT (Mass Rapid Transit), and the auction of c.3,000 acres of prime government land in Sungai Buloh combined with lower start rates in new launches (residential segment) making supply tighter.

    However, near-term growth may be sporadic as the Asia Property Market Sentiment Report (H1, 2013) points out that affordability and rising house prices are the main concern of market participants. Further, Bank Negara, to avoid an asset bubble has introduced measures such as loan-to-value ratio (LTV) of 70% for 3rd and onwards property loans, Real property gain tax raised to 15 % for properties sold in first 2 years and 10% on property sold between 2-5 year period, and using net income instead of gross income to calculate debt service coverage ratio. These factors among others could cool residential property sector in near term but most survey respondents feel they're more lip service than anything else.

    IJM Land (5215.KL) provides good cross sectoral diversification with robust sales and exciting projects in the pipeline. IJM Land has witnessed a sale CAGR 0f 42.17% between FY08-12, with latest two years sales hitting more than RM1b mark.

    IJM Land is both a niche and township developer with its residential properties ranging from mass market to high-end, as well as some commercial developments. It has a construction unit too and a hotel division with two hotels, one each in the Klang Valley and Pahang. Further, it has international presence with its exposure in selected projects in various geographies such as London, Australia, Singapore and China.

    (click to enlarge)

    At the current price of RM2.37 IJM Land trades at a P/E of 15.8x. We believe that continued robust sales growth, strong project pipeline and overwhelming response to new launches along with selective exposure in international market provides strong visibility and reliability for future earnings growth and thus for further upside. The election risk ahead could provide good entry points before the stock rerated after post-elections.

    The investment rational is based on following factors:

    1. Continued robust growth momentum:

    Till 9M13 the company has reported property revenue of c.RM850m (+5% yoy). It's expected to cross total revenue of c.RM1.4b (RM1.2b in fy12 end). IJM is expected to reach an overall revenue target of RM1.7b in FY13 end driven largely by strong booking, overwhelming response in new launches and current projects. IJM's focus on landed property and affordable to mid priced segments, priced up to RM1.5m per unit (where demand remains good) should ensure continued revenue growth in residential segment in near term.

    Continued sales growth should be supported by three crucial projects, together amounting to RM20b, namely,

    a) RM11b "Rimbayu" near Kota Kemuning in the Klang Valley,

    b) "THE LIGHT Waterfront" with a gross development value (NYSE:GDV) of RM6b in Penang, and

    c) The "Sebana Cove" with a GDV of RM3b in Johor.

    Mr. Datuk Soam Heng Choon, IJM's CEO and MD, believes the aforesaid 3 projects are crucial for the company in next 3 years (although independent project life is much longer). In addition, revenue should be bolstered from various land developments and other projects such as a recent JV with Amona Development Sdn Bhd to develop 23.4ha planned mixed project in Kerinchi and Pantai Dalam near the Mid Valley Megamall.

    1. Diversified product portfolio and client base:

    IJM has been present in both residential and commercial segments. Its residential projects cater to affordable and mid income level properties priced below RM1.5m. It also offers upper mid income and high end properties selling above RM1.5m. However, its main focus is low to mid-markets which are expected to fare well in an environment where credit availability is being tightened, and affordability and rising housing prices are sited as major concern.

    In commercial space the company is engaged in developing and building/ constructing office space, retail mall and industrial sites. This includes hotel and resort projects too. Current property data (in general for industry as a whole) suggest that retail segment in commercial space should continue to witness higher growth with stable rental yield. Rental yields should continue to be stable in hotel/ resort segment too compared to office segment where occupancy rate are yet below average.

    As part of its growth strategy, IJM Land has entered into various JV for development of properties.

    1. International presence but still very much Malaysian property player:

    IJM has development projects in Australia, Singapore, China and Vietnam. It has recently joint-ventured with Lite Bell Lite Bell Consolidated Sdn Bhd to develop 1ha site in Royal Mint Street in London (UK) comprising hotel and residential components. The project is estimated to generate Rm1.38b. IJM holds 51% in the JV. International exposure to selected projects provides the needed geographical diversification and experience besides insulating them from downtrend in home market. Also limited exposure (in terms of selected project) keeps it insulated from global turmoil.

    IJM is still mainly a focused on the Malaysian property market given its limited international exposure, large local land bank and larger share of future revenue stream coming from Malaysia.

    1. Land Bank to hold future value:

    IJM has a land bank of more than c.6, 000 acres with an estimated GDV of c.RM$31.4b spread across the Northern, Central and Southern regions of the Peninsula as well as in Sabah, East Malaysia, which will sustain earnings in the next 8-10 years".

    Further, IJM's land bank near to and coming in way of MRT, ETP and other large and long term projects should hold key for future value.

    1. Strong balance sheet and sound financial position:

    IJM has a strong balance sheet with enough room for expansion and leverage. IJM in its 3Q13 reported a net cash position of RM98.3m and a positive net cash flow from operations of c.RM174m. Strong financial position should stand to the advantage of IJM while in tendering process of government prime lands such as 3,000 acres at Sungai Buloh, Klang Valley thus improving land bank size and overall value.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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