KERJAYA surpassed our previous target price range (RM1.69-RM2.20) last week. In the current challenging property market where sales are weak, developers are focusing on delivery to preserve margins and strengthen brand quality; hence, realizing unbilled sales with quality products without delays is paramount. KERJAYA’s sterling track records of timely delivery have made them sought after by prominent developers. Following yesterday’s contract win, KERJAYA has secured RM986m of jobs YTD surpassing our initial target of RM500m. Hence, we upgrade our replenishment target to RM1.1b-RM1.2b and earnings to RM95.4m-RM117.7m. We upgrade KERJAYA to TRADING BUY with higher TP of RM2.62 based on 12.0x FY17 FD PER.

Bagged new contract and declared dividend! Yesterday, KERJAYA secured a RM213.8m mixed development job known as “The Apple” from Apple 99 Development Sdn Bhd which is slated for completion by October 2018. We are POSITIVE on this contract as KERJAYA has secured RM986m worth of contract YTD, surpassing our initial RM500m target. Following the win, we increase our FY16-17E order book replenishment target to RM1.1b-RM1.2b (previously RM500m for FY16 and FY17). KERJAYA’s outstanding order book stands at c.RM2.7b providing earnings visibility for 2.5 years. In addition to the award, KERJAYA declared a 4.0 sen interim dividend versus our estimated 5.3 sen in FY16 (refer overleaf).

Thriving in a challenging property market. Over the last couple of years, the sector has been plagued by increasing incidences of delayed delivery of high-rise residential projects and given the tight construction labour shortages, we expect more of delays. Outlook for developers is challenging and margins and profitability have come under pressure. With weaker sales trajectories, developers have to fall back on delivery and quality, i.e. realization of unbilled sales with minimal to no delays, for two major reasons; (i) margins preservation, and (ii) strengthening brand quality to fight for market share in a shrinking market. KERJAYA’s strong track records in timely project delivery have made them a highly sought-after contractor by prominent developers such as E&O, SPSETIA and ECOWLD, which are KERJAYA’s recurring clients. As a result, we gather that other developers are also seeking them out more aggressively. KERJAYA is now able to command premium margins over other contractors and only accepts contracts at 10-12% PAT level. Considering that their long-term recurring clients have high-rise developments lined up namely BBCC (Ecoworld), and Puro Place (E&O), we can be expecting more contract flows from them (refer overleaf).

Expecting stable cash flow and consistent dividends. Part of KERJAYA’s success factor is its choice clients with established long-term trust. Hence, timely payments from these developers can be expected translating to healthy cash turnarounds. We estimate FY16 net cash to rise to c.RM110m (RM32m in 1Q16) from its recent placement exercise to meet shareholding requirements. With such a level of cash backing coupled with their healthy cash flow, we can expect KERJAYA to easily pay out dividend at a 30% DPR level in which they have announced a 4.0 sen dividend. We believe the stock could rerate further if the group eventually formalizes a minimum dividend policy.

Peers Comparison. KERJAYA’s construction margins remain one of the highest with 1Q16 PAT margin of 14% vs. other small-mid cap peers’ range (MITRA, KIMLUN, MUHIBAH) of 6-9%. Their RM2.7b outstanding order book also provides earnings visibility of c.2.5 years, which is above peers’ average of 2 years. Additionally, KERJAYA is one of the few contractors standing at net cash besides PTARAS and ECONBHD. If KERJAYA dishes out DPR of 30%, it would be the second highest among contractors in our space losing out to only PTARAS, which offers 56%. We note that KERJAYA has the largest market cap of RM1.2b against other small mid-cap peers (RM0.6b-RM1.0b).

Earnings upgrade! We upgrade KERJAYA’s FY16-17E earnings by 5-18% after factoring: (i) higher replenishment target of RM1.1b-RM1.2b (previously RM500m for both), (ii) adjusting for timing in recognition with the bulk of recognition in final stages, and (iii) higher margins as in our last report we forecasted a higher proportion of infrastructure job wins. While FY16E earnings growth is immaterial, we note that FY17E growth of 24% is relatively strong against peers’ 2-year CAGR growth of 14-21%.

Trading BUY. Since our last report in January (NR; FV: RM1.69-2.20), KERJAYA has surpassed our high-end target price last week. With net cash position coupled with better margins, earnings visibility and earnings growth against peers, we are comfortable to ascribe a PER of 12.0x for KERJAYA, which is at the higher end of our targeted PER range for small-mid cap construction players of 9.0-13.0x. We roll valuation to FY17E and upgrade KERJAYA to Trading Buy (previously NR) with a higher TP of RM2.62 (previously RM1.69-2.20) providing an upside of 13.2%.

Source: Kenanga Research - 20 Jul 2016