New plans. Recall from our last report dated 30 April 2015, KERJAYA (formerly known as FUTUTEC) had entered into a HoA with their own major shareholders namely Datuk Tee Eng Ho, Datin Toh Siew Chuon and Mr. Tee Eng Seng to inject construction companies namely Kerjaya Prospek (M) S/B (KP) and Permatang Bakti S/B (PB) into KERJAYA. Since then, changes have been made to the deal and they will now be injecting both companies for a total indicative price tag of RM458.0m which will be financed by: (i) issuance of 37.0m new shares at RM1.16, (ii) issuance of 310.0m new Redeemable Convertible Preference Shares (RCPS) at an issue price of RM1.16, and (iii) a cash consideration of RM55.2m. The target companies will bring in a total orderbook of RM2.3b (outstanding: RM1.6b) which provides visibility till 2018, compared to the current KERJAYA’s orderbook of only RM97.1m.

New placement of 100.0m shares. KERJAYA has proposed an issuance of up to 100.0m new KERJAYA shares to: (i) fund the RM55.2m cash portion of the acquisition, (ii) meet the Group’s working capital requirements arising from the increase of order book, and (iii) increase the amount of KERJAYA shares held by public shareholders to comply with the public spread requirement post the acquisition of the targeted companies. The public shareholding is expected to decrease from 28% to 20% after the said corporate exercises, below the public spread requirement of 25%. Egovision being the majority shareholder is expected to place out shares to meet this requirement. (Refer overleaf)

The new mid-cap contractor in town. As an enlarged entity with a net cash position of RM126.5m (assuming issue price of RM1.50 for private placement), we believe the group will participate in bigger jobs of RM500.0m-RM1.0b contract size in the high-rise building segment. In fact, we understand that currently KERJAYA and the target companies have a total tender book of RM1.2b and management is targeting to secure RM600.0m jobs this year. KERJAYA’s major client list consists of top developers in town such as ECO WORLD, SP SETIA and E&O.

On-going developments. KERJAYA launched their first maiden project – Vista Residences @ Genting Highlands in July 2015. KERJAYA has about 10.1 acres landbank in Klang Valley (Genting Highlands and Shah Alam) with total potential GDV of RM500.0m (refer overleaf).

Above industry average margins. Over the past three years, KERJAYA has managed to fetch an average net margin of 22.0%, mainly due to their specialization in construction fittings, which fetched higher margins. However, post asset injection, we are projecting for its net margin to come down to c.10% as they take on more civil works for building projects. Nonetheless, our projected net margin of c.10% is still higher than the average building contractors’ margins of 6-8%. We believe the group could achieve above-average margins largely due to the group’s ability to execute end-to-end construction solutions on their own with minimum outsourcing.

Profit guarantee of RM150.0m for 3 years. Interestingly, the injection comes with a cumulative profit guarantee of RM150.0m over the next three years (FY16-18), which implies an annualized RM50.0m p.a. However, we are projecting its FY16-17E net profit to be RM91.3-100.9m underpinned by the existing orderbook of c.RM1.7b from both Kerjaya Prospect Sdn Bhd (RM1.6b) and KERJAYA (RM97.1m), coupled with our orderbook replenishment assumptions of RM500.0m per annum.

NOT RATED. Since our last report (Not rated; TP: RM1.78) KERJAYA hit our previous TP temporarily before going into a downtrend to a low of RM1.17. Share price started to pick up again since August 2015 likely due to the newly amended HoA. By ascribing a Fwd PER of 10.0x-13.0x to FD EPS FY16E of 16.9 sen, we value KERJAYA at RM1.69-RM2.20 on a fully diluted basis*. Our valuations are inline with our targeted Fwd PER range for small-mid cap construction players at 9.0x-13.0x and we believe our ascription of 10.0x-13.0x for KERJAYA is fair due to their above industry average margins and their strong financial position. · However, we note that KERJAYA might encounter some replenishment risk when building construction jobs slowdown in the upcoming years due to the slowdown in property launches by developers. We also remain cautious on the sustainability of their higher-than average construction margins. While the higher end of our valuation offers compelling upsides, we note that there could be share overhang arising from the conversion of RCPS, which is currently in-the-money. 

Source: Kenanga Research - 26 Jan 2016