Last Friday, KERJAYA announced that they had secured a RM31.6m housing project from Bina BMK S/B at E&O’s Bandar Tanjung Pinang (Phase 1). We are NEUTRAL on the award given that it is well within our FY17E replenishment target of RM1.6b. Maintain our FY17-18E earnings forecasts. Post award, we reiterate our OP call with a higher TP of RM3.10 (from RM2.64) after rolling forward our valuation to FY18E.

Small housing project at E&O’s development. Last Friday, KERJAYA announced that they had secured a housing project worth RM31.6m from Bina BMK S/B. The scope of works comprises main building works for 32 units of 3-storey terrace house at E&O’s Bandar Tanjung Pinang (Phase 1), Pulau Pinang slated for completion by 21st September 2018.

Neutral on the award. This marks KERJAYA’s first win of the year and we are NEUTRAL on the award as it is well within our FY17E replenishment target of RM1.6b; only making up 2% of our target. Assuming PBT margin of 14%, the project is expected to contribute c.RM2.2m to KERJAYA’s bottom-line per annum.

More from E&O? Recently, KWAP injected RM776m into E&O’s STP Phase 2A for a 20% stake. The RM776m proceeds will fund reclamation works of c.250ac of land, infrastructure costs and working capital. We believe this collaboration of E&O and KWAP to jointly develop STP Phase 2A project in Penang would expedite the award process and is poised to benefit KERJAYA given that E&O has been a long recurring client of KERJAYA’s. In addition, we note that KERJAYA is already onsite executing the channel dredging works for STP Phase 2 (awarded back in 21st March 2016) which is a part of the STP 2 reclamation works. Hence, we are optimistic on KERJAYA’s ability to secure more packages for the STP 2 development in FY17E. Currently, KERJAYA’s outstanding order-book stands at c.RM2.7b providing healthy earnings visibility for the next 2.5 years.

Maintain FY17-18E earnings. Post award, we make no changes to our FY17-18E CNP RM125.9m-RM146.3m.

Reiterate OUTPERFORM with higher SoP-derived TP of RM3.10 (from RM2.64) as we roll forward our Construction and Property valuations to FY18E. Our new TP implies 12.0x FY18 PER in line with our targeted peers’ range of 9.0-13.0x. While our valuation is at the higher end of our targeted range, we deem it fair considering that KERJAYA’s net margins of c.12% remain superior over peers’ (MITRA, HSL, KIMLUN) average of 9%.

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

Source: Kenanga Research - 03 Apr 2017