• BUY with a higher MYR1.78 TP from MYR1.56, 20% upside and c.6% yield. We expect Kerjaya Prospek’s 3Q23 core earnings to be 8-10% higher YoY, backed by higher progress billings, and improved labour supply. With a plethora of bright prospects (mentioned below) underpinning its job replenishment trends, we consider the stock undervalued, trading at 1.5SD below the Bursa Malaysia Construction Index’s 5-year mean P/E.

• KPG announced its ninth job win (fourth in Penang) for FY23 worth MYR104.7m, awarded by Persada Mentari for the completion of 69 units of 3-storey semi-detached and 3-storey terraced houses in Andaman Island (part of Seri Tanjung Pinang phase 2 (STP2) development). The project shall commence from December for 26 months. This brings KPG’s YTD job win to MYR1.6bn – exceeding our initial FY23F job replenishment target of MYR1.5bn. Meanwhile, KPG’s latest outstanding orderbook stands at MYR4.8bn, translating into earnings visibility of up to four years.

• In terms of job replenishment breakdown, c.47% of the YTD FY23 new job wins came from Penang, with MYR524m coming from Eastern & Oriental’s (EAST MK, BUY, TP: MYR0.88) STP2 development and the remaining MYR226m from Aspen Vision City. Overall, KPG secured MYR1.7bn and MYR1.4bn contracts under STP2 and developments related to the Batu Kawan area.

• Prospects. STP2 is divided into Andaman phase 1 (253 acres) and phase 2 (507 acres). KPG was involved in the reclamation and coastal protection structure works of Andaman phase 1 for a cumulative job value of c.MYR380m. With Andaman phase 2 yet to begin any significant reclamation works, we believe KPG could stand a fair chance to do the reclamation works for this phase of STP2. Moreover, KPG was appointed as the contractor for the developments on STP2, such as The Meg project (1,020 units) for a value of MYR265m, putting it as a frontrunner for other property projects under STP2. More importantly, KPG’s venture into industrial buildings via the partnership with Samsung C&T could serve as a strategic buffer to offset any slowdown in property-related jobs.

• We increase FY23F-FY25F earnings by 1-5% as we revise our FY23F job replenishment assumption to MYR1.8bn from MYR1.5bn. We think that near-term project wins may come from STP2, particularly the Arica project, which is likely to be worth MYR100m-200m. Valuation wise, we now ascribe a target P/E of 12.5x (previously 11x) to KPG’s construction arm in our SOP valuation. We believe this target valuation (above the small- to mid-cap target range of 8x-10x) is fair for KPG – to reflect its consistent trend of job wins and its larger market capitalisation vs other small mid cap contractors. As such, we arrive at a new SOP-derived TP of MYR1.78 (previously MYR1.56) – which includes a 0% ESG premium/discount to our intrinsic value, based on our in-house ESG proprietary scoring methodology.

• Key downside risks: Property market slowdown and prolonged cost material pressures.

Source: RHB Securities Research - 7 Nov 2023