Yesterday, KERJAYA announced that their 70% owned subsidiary – Future Rock S/B has secured a RM45.9m subcontract from China Communications Construction Company (CCCC) at Seri Tanjung Pinang (STP) Phase 2B. NEUTRAL on contract as YTD wins is still within our FY17 replenishment target of RM1.6b. No changes to earnings. Downgrade to UP with a higher TP of RM3.15.

New STP2 contract. Yesterday, KERJAYA announced that their 70% owned subsidiary – Future Rock S/B has secured a RM45.9m subcontract from China Communications Construction Company (CCCC) which entails setting up a perimeter bund for Seri Tanjung Pinang (STP) Phase 2B slated for completion in July-18.

NEUTRAL. We are NEUTRAL on the award as their 70% effective stake in this newly secured contract coupled with existing YTD wins amounts to RM412m - which is still within our targeted replenishment of RM1.6b; accounting for 25% of our full-year target. We note that management targets a more conservative replenishment of RM0.8b for FY17. Assuming PBT margins of 14%, the contract is expected to contribute c.RM3.4m to KERJAYA’s bottomline for the next 10 months.

Outlook. Currently, KERJAYA’s outstanding orderbook stood at RM2.6b giving them a visibility of c.2.5 years. Meanwhile, KERJAYA’s tenderbook stood at RM1.4b, which we believe, comprise of jobs from their core clients (SPSETIA, E&O and ECOWLD). We note that Dato’s Tee’s (KERJAYA major shareholder) private property arm plans to launch a mixed development project in Old Klang Road with GDV of RM1.0b which we believe would amount up to c.RM300-400m of contracts likely to be secured by KERJAYA. Furthermore, we believe that KERJAYA could possibly undertake a 1-for-1 bonus issuance as the Companies Act 2016 states that the share premium account will no longer be applicable from FY18 onwards and KERJAYA has a high share premium of RM332m vs share capital of 257m (as of 1Q17).

Maintain earnings. Post award, we maintain our FY17-18E earnings based on FY17-18E replenishment target of RM1.6b-RM1.2b.

Downgrade to UP but with a higher TP of RM3.15. YTD, KERJAYA’s share price has gained 67% surpassing our initial TP of RM3.10 and is also amongst the top gainers compared to other KLCON Index members’ average YTD gain of 18%. In addition, we highlight replenishment risks whereby KERJAYA would have to replenish RM1.2b worth of contracts (vs current tenderbook of c.RM1.4b) in the next 5 months based on our targeted replenishment of RM1.6b and they are currently behind schedule. Even should they managed to achieve our FY17-FY18E target replenishment of RM1.6b-RM1.2b to sustain earnings moving forward, KERJAYA is already currently trading at FY18E PER of 14x; much higher than small mid cap peers average of 11x. Even in a more optimistic scenario whereby KERJAYA exceeds our FY17-FY18E replenishment targets and we upgrade their construction valuations to 14x (from 13x), there would still be a downside of 8% (vs last closing of RM3.70) indicating an UP call. We note that our existing applied construction valuations of 13.0x is already the peak amongst small-mid cap construction peers under our coverage. Given that risk to reward ratio is no longer compelling, we downgrade KERJAYA to UP (previously MP) but with a higher SoP- derived TP of RM3.15 (from RM3.10) after updating property valuations to 6x (from 5x) to reflect closer to average valuations of small mid cap property counters. We believe KERJAYA’s rerating catalyst would be: (i) implementation of a dividend policy with DPR of >35%, and (ii) higher-than-expected replenishment/margins.

Source: Kenanga Research - 02 Aug 2017