IJM Corp Bhd 2024 Q2 Performance: Profit Challenges and Future Growth Potential | Moomoo Research

On August 28th, IJM released its financial report, reporting a 14.6% revenue growth in the second quarter of 2024, reaching RM 1.404 billion.

However, a significant increase in exchange losses and rising costs resulted in a 15% decrease in pre-tax profit and an 18.99% decrease in net profit margin. Excluding unrealized exchange losses and fair value losses, pre-tax profit actually increased by 26.0%.

What are the factors worth exploring behind this discrepancy?

IJM Corporation Berhad (stock code: MYX: 3336) is an investment holding company focused on constructing hotels, residential areas, highways and transportation systems, and other large industrial structures. In addition to construction work, the company provides building materials internally and externally, and offers comprehensive solutions through quarrying operations, precast concrete, scaffolding, and other supplies.

The company has six operating segments: Construction, Property Development, Manufacturing and Quarrying, Infrastructure - Toll Roads, Infrastructure - Ports, and Investments. The top three segments are Construction (47.95%), Property Development (37.72%), and Manufacturing and Quarrying (21.55%).

It is worth noting that industries such as construction, property development, and manufacturing and quarrying are highly correlated with economic conditions. When the economy is strong, confidence of businesses and individuals increases, leading to higher demand for housing, commercial space, and infrastructure, driving growth in construction and property development activities. Conversely, during an economic slowdown or recession, demand weakens, and these industries may face issues such as reduced orders and tight cash flows.

Furthermore, IJM's business operations are primarily concentrated in Malaysia, accounting for 92.01%, with 7.51% in India and 0.48% in the UK. Given that its business is mainly focused in Malaysia, the country's economic performance has a significant impact on IJM's performance. In recent years, Malaysia has shown strong economic growth, providing a favorable operating environment for IJM and supporting its continued growth and development in key sectors such as construction and property development.

According to IJM's 2024Q2 financial report, despite an increase in operating revenue and gross profit, a significant increase in foreign exchange losses and rising costs led to a decline in the company's profitability, with pre-tax profit and net profit margin decreasing by 15% and 18.99% respectively compared to the same period last year, contrasting with Malaysia's overall stable economic growth.

Specifically, IJM's operating revenue reached RM 1.404 billion, a 14.6% increase compared to the same period last year. However, as the growth rate of main business costs exceeded the growth rate of operating income, the gross profit margin decreased by 1.08% year-on-year.

Further analysis reveals that the decrease in pre-tax profit was mainly due to the increase in the following costs and expenses: foreign exchange differences, other operating expenses, selling expenses, financial cost, and administrative expenses.

Of note, the exchange losses increased by RM 43.059 million year-on-year. The significant increase was due to the unrealized exchange loss of RM 1.4 million in the second quarter of 2024, compared to the higher unrealized exchange gain of RM 41.7 million recorded in the second quarter of 2023, mainly related to the property development department.

Additionally, other operating expenses increased by RM 8.412 million year-on-year, possibly due to the recognition of fair value losses of RM 19.9 million for the WCE Holdings Berhad (WCEHB) warrants in 2024Q2. Therefore, caution is advised as there may be a risk of "deviating from core business."

However, after excluding the impact of unrealized exchange differences and fair value losses, IJM's pre-tax profit actually increased by 26.0% year-on-year.

From an operational perspective, although IJM's overall profit performance is not satisfactory, its core business segment - the construction segment - has performed exceptionally well. The segment's revenue saw significant growth, and pre-tax profit increased by 110.5% year-on-year, mainly due to an increase in construction order volume. Additionally, the Infrastructure - Ports segment also achieved strong growth, with revenue increasing by 23.0% year-on-year and pre-tax profit almost doubling, mainly due to increased throughput.

In contrast, the performance of other segments appears relatively weak.

The revenue and pre-tax profit of the Property Development segment decreased by 7.3% and 50.8% respectively, mainly due to unrealized exchange losses;

The revenue of the Manufacturing and Quarrying segment decreased by 12.7%, with a 1.1% decrease in pre-tax profit, primarily due to a reduction in product delivery volume;

The Infrastructure - Toll segment was affected by a decrease in overseas traffic volume, with revenue and pre-tax profit decreasing by 13.8% and 38.1% respectively.

As for the Investment and Other segments, their revenue and pre-tax profit exhibited more erratic performance: the increase in revenue was due to reclassifying the Infrastructure Connectivity business from the Infrastructure category to the Investment and Other category; the significant increase in pre-tax losses was due to the recognition of fair value losses of RM 19.9 million for the WCE Holdings Berhad (WCEHB) warrants.

However, IJM stated in the announcement that its order book remains strong, with the Construction segment currently holding RM 6.5 billion in outstanding orders, including RM 1.3 billion in new confirmed engineering projects. Considering its unbooked sales of RM 2.3 billion and diversification of new real estate projects planned for the 2025 fiscal year, as well as the Manufacturing and Quarrying segment's secured 900,000 tons of orders and upcoming new projects, IJM expressed confidence in delivering strong performance in the next quarter. Of course, we still need to observe its actual performance to validate these statements.

Looking at the cash flow generated from operating activities, IJM recorded a positive cash flow of RM 1.38 billion, indicating the company's healthy operation of core business and effective and timely collection of receivables. This performance demonstrates that IJM possesses strong profitability in its core business areas and efficient management of daily operations.

However, in terms of cash flow from investing activities, the company experienced a significant outflow of funds amounting to RM 266 million, mainly involving property, buildings and equipment, business transactions, investment products, and advances and loans to third parties. These fund flows suggest that IJM is actively expanding and investing in new projects, seeking future growth opportunities to support long-term development. It is noteworthy that compared to the previous period, there is a downward trend in cash outflows from investing activities, indicating a potential slowdown in the company's investment activities.

Looking at the cash flow generated from financing activities, IJM's main expenditure was focused on repaying existing debts, totaling RM 514.82 million, resulting in an overall cash outflow from financing activities of RM 126 million. This figure increased by 47.05% compared to the previous period. However, the current financing expenditure is lower than the average level seen in previous quarters, primarily due to a decrease in debt repayment amounts. This indicates that IJM is taking action to optimize its debt structure, aiming to reduce financial costs and risks.

In summary, the cash flow situation of IJM indicates a strong performance in operating activities, demonstrating a healthy flow of core business income and effective daily operational management. However, there are some challenges in investment and financing activities, leading to a decrease in year-end cash balance.

Regarding dividend payouts, although the dividend per share decreased in 2021, the company quickly adjusted and increased dividend payments in the following years, demonstrating its focus on shareholder returns. Specifically, the dividend yield reached 4.48% and 4.02% in 2022 and 2023 respectively, indicating the company's strong performance during this period and its ability to provide substantial returns to shareholders. Despite a decrease in the dividend yield in 2024, the company maintained a stable dividend frequency and payout ratio, reflecting the maturity of IJM in financial planning and risk management.

Overall, the company's dividend payout situation indicates a certain level of stability and reliability in financial management.

In conclusion, with the continued development of the Malaysian market and expansion of overseas projects, IJM is poised to further strengthen its market position. Despite facing challenges such as exchange rate fluctuations, rising costs, and declining performance in certain business lines, the management team is confident about the future, not only based on solid order book, but also on their keen capture of emerging opportunities.

However, with the recent positive economic development in Malaysia and a relatively subdued financial report, investors looking to invest in IJM will need to patiently wait for favorable market opportunities and closely monitor subsequent changes. If the financial report continues to fall below expectations, business continues to shrink, and cash flow also decreases, it is advisable for investors to temporarily avoid risks.