Yesterday, KERJAYA announced that they have secured a RM442m building contract from Aspen Vision City S/B which is a JV between Aspen Group (listed in Singapore) and IKEA South-East Asia. NEUTRAL on the award as it is within our FY17E replenishment assumption of RM1.6b. Post award, we tweak our FY17-18E earnings by +0.6%- +1.2% after increasing our construction margins assumption while reducing our FY17E replenishment target. Maintain UP with a higher TP of RM3.30.

RM442m contract. Yesterday, KERJAYA announced that they have secured a building contract worth RM442m from Aspen Vision City S/B which is a JV between Aspen Group (listed in Singapore) and IKEA South-East Asia. The project also known as ‘Vertu Resort’ is located in Penang comprising construction works for 5 condominium blocks ranging from 20-storey to 36-storey with of 1,246 units of condominiums and a floor of community recreational facilities to be built above an 8- storey car park podium slated for completion by 4th November 2020 (38 months).

Feeling Neutral. We are NEUTRAL on the award as this newly secured contract coupled with existing YTD wins amounts to RM854m - which is still within our targeted replenishment of RM1.6b; accounting for 54% of our full-year target. We note that management targets a more conservative replenishment of RM0.8b in FY17 for which they have already surpassed. Assuming PBT margin of 14%, the contract is expected to contribute c.RM14.7m to KERJAYA’s bottom-line/annum.

Outlook. Currently, KERJAYA’s outstanding order-book stands at RM2.9b giving them a visibility of c.2.5 years. We believe further project wins could likely stem from Dato’s Tee’s (KERJAYA major shareholder) private property arm that has plans to launch a mixed development project in Old Klang Road with GDV of RM1.0b leading to c.RM300- 400m worth of contracts to be dished out. Besides that, 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).

Reduce FY17E replenishment target but upgrade in margins. Given that KERJAYA has only secured 54% of our RM1.6b replenishment target YTD, we decide to trim our FY17E replenishment to a more achievable target of RM1.1b (from RM1.6b). That said, we upgrade our overly conservative average construction PAT margins of 11% to 12% given that KERJAYA had for the past four quarters displayed higher- than-expected average construction PAT margins of 13%. Post adjustments, we tweak FY17-18E earnings slightly higher by 0.6%- 1.2% to RM126.7m-RM148.8m.

Maintain UNDERPERFORM with a higher TP of RM3.30. Post adjustment to earnings and imputing for 50% of FY18E net cash (in line with SUNCON) into our SoP, we increase our SoP-derived TP to RM3.30 (from RM3.15). That said, we reiterate our UP call as we feel that KERJAYA’s risk-to-reward ratio is still not compelling given that they are trading at FY18 PER of 13.9x while also implying a FY18E construction PER of 14.5x – which we consider high given that it is above our ascribed range of 9-13x for small mid-cap contractors within our universe.

We believe KERJAYA’s rerating catalyst would be higher-than- expected replenishment/margins.

Source: Kenanga Research - 18 Aug 2017