We met up with KERJAYA’s management recently for a company update and came back reassured with their near-to-mid-term outlook which is backed by strong outstanding order book of RM2.89b. Key highlights during the meeting include: (i) a recap for FY16, (ii) replenishment targets for FY17, and (iii) future plans for their cash pile. Post meeting, we maintain our FY17-18E earnings and reiterate our OP call with an unchanged TP of RM2.64.

Recap on FY16. For FY16, KERJAYA had secured RM1.5b of jobs in line with our RM1.6b target. Their property arm’s sole on-going project - Vista Genting (GDV of RM300m) that was launched in early FY16 has achieved a healthy 60% take-up rate. During the year, KERJAYA spent RM50m-60m on CAPEX due to the increased job wins (+25% YoY vis-à-vis FY15’s replenishment of RM1.2b). Moving forward, we are expecting CAPEX to taper down to lower levels of c.RM10m as the bulk of the essential CAPEX was completed in FY16.

A conservative replenishment target. Management targets to achieve RM800m worth of jobs in FY17 on the back of their tender book of RM1.5b. As of 9M16, KERJAYA’s outstanding order book stood at RM2.89b providing earnings visibility for the next three years. While our FY17E replenishment target of RM1.6b is double management’s, we note that KERJAYA targeted KPI tends to be overly conservative – citing their initial FY16 replenishment target of RM600m versus achieved amount of RM1.5b. Besides, we note that KERJAYA is backed by Dato’ Tee’s (KERJAYA’s Chairman and majority shareholder of 75%) private property arm which has a remaining GDV of RM1.6b of which we expect will contribute c.RM400-500m worth of jobs to KERJAYA for the next 2-3 years.

Potential plans for their sizeable warchest. On the back of KERJAYA’s net cash position of RM110m (as of 3Q16), we believe KERJAYA could be looking out for potential acquisitions of smaller private construction firms with specialised skillsets in piling and land reclamation in order to further expand their construction portfolio which is currently overly high-rise-centric. In addition, we believe management will be able to dish out a 30% DPR (PAT level) for FY17E – suggesting a DPS of 6.7 sen; above FY16’s DPR of 23% due to the lower expected CAPEX in FY17 - providing stronger cash flow.

Earnings intact. Post meeting, we make no changes to our FY16- 17E earnings of RM98.9m-125.9m. We believe that they would be able to register satisfactory performance in 4Q16 which is expected to be largely within our FY16E earnings of RM98.9m.

OUTPERFORM with unchanged TP of RM2.64. We continue to like KERJAYA for their conservative approach towards jobs selection – only taking up the job with clients that are good paymaster and making sure jobs secured are within their working capacity. We believe this strategy allows for a sustainable and robust growth for the bottom line in the long run. Hence, we reiterate our OUTPERFORM rating with an unchanged SoP- derived TP of RM2.64. Our TP implies 11.8x FY17E PE, in line with our targeted peers’ range of 9.0-13.0x.

Risks to our call include: (i) lower-than-expected replenishment and margins, (ii) delays in construction works.

Source: Kenanga Research - 20 Jan 2017