We initiate coverage on KERJAYA with an OUTPERFORM call (from Trading buy) and a TP of RM2.64 (from RM2.62) based on SoP. Merits include: (i) being a sought after contractor, (ii) a set of reputable recurring clients, (iii) three years earnings visibility backed by RM2.9b outstanding orderbook, (iv) supported by major shareholder’s (Datuk Tee Eng Ho) private property arm, (vi) healthy cash turnaround with capacity for 30% DPR from FY17, and (vi) net cash position with above average construction margins.

Prospering in an adverse property market. KERJAYA’s main business lies in the construction of high-rise residential which is currently facing a slowdown. However, KERJAYA is unfazed with the slowdown but instead have been winning more jobs than previous years as compared to the property boom cycle. This is mainly due to developers focusing on time delivery and quality in a weaker sales backdrop for two major reasons: (i) preservation of margins, and (ii) strengthening of brand quality to gain market share in a shrinking pie. In light of increasing industry delay incidences, KERJAYA’s 20 years without a single LAD recorded since day one has positioned it as a highly sought after contractor.

Two new jobs. As of our last On Our Radar report (20/7/16), KERJAYA has secured two new contracts worth RM485m from: (i) Numestro Group for the construction of Arte Mont Kiara in KL Metropolis, and (ii) ECOWLD for Eco Terraces. We are positive on the jobs as KERJAYA has secured RM1.47b worth of external jobs (RM102m internally), surpassing our FY16E replenishment target of RM1.1b for the second time this year. Subsequently, we increase both our FY16E and FY17E replenishment target further to RM1.6b.

Strong earnings visibility. KERJAYA’s outstanding orderbook of RM2.9b (as of 8M16) provides earnings visibility of c.3.0 years, above small-mid-cap peers’ average of 1.0-2.0 years and comparable to its bigcap peers’ earnings visibility of 2-3 years. The RM2.9b outstanding orderbook comprise of 94% high rise jobs with the rest being infrastructure. We believe its orderbook has further upsides if KERJAYA can secure E&O’s Puro Place building job in Jalan Kia Peng by year-end in which KERJAYA is currently working on the injection piling works slated for completion in Nov 2016.

Healthy cash position. Being an in-demand contractor allows KERJAYA to have the flexibility of choosing their clients. We understand that KERJAYA is cautious with job selection which translates to healthy cash turnarounds due to good paymasters. Post 4.0 sen/share dividend, we expect KERJAYA’s net cash level to be c.RM100m for FY16. Management cited plans to dish out 30% DPR from FY17 onwards which we believe is achievable owing to their strong cash position.

Earnings upgrade. Post upgrade of replenishment targets to RM1.6b for FY16 and FY17 (previously RM1.1b-RM1.2b for FY16-17) to incorporate the recent wins, we upgrade KERJAYA’s FY16-17E earnings by 3.6%-7.0%. Our new earnings indicate strong FY17E earnings growth of 27%, higher than peers’ average of 14%. At a 30% DPR, we are estimating FY17E DPS of 6.7sen which implies FY17E yield 2.9%.

OUTPERFORM with TP of RM2.64. We upgrade our TP to RM2.64 (from FV of RM2.62) with an OUTPERFORM call after switching valuation methodology to SoP to better reflect KERJAYA’s property contribution (previously applied 12.0x FY17 PER). Our new TP implies 11.8x FY17 PER which is inline with targeted peers’ range of 9-13x.

Source: Kenanga Research - 14 Oct 2016