KERJAYA’s 1H17 CNP of RM61.8m came within our and consensus expectations, accounting for 49% of both our estimates. No dividends as expected but it announced a 25% minimum dividend policy. Maintained our FY17-18E earnings estimates. Maintain UP with unchanged TP of RM3.30.

Within expectations. 1H17 CNP of RM61.8m came in within our and consensus expectations accounting for 49% of both estimates. No dividends declared as expected, but it announced a 25% minimum dividend policy moving forward.

Results highlight. 2Q17 CNP increased 14% QoQ backed by: (i) increased property revenue (+80%) and improved margins (+12ppt) as construction for their development project Vista Genting progressed to 40%, and (ii) increase in construction margins (+4ppt) from the completion of a number of jobs in 2Q17. Meanwhile, 1H17 CNP increased 28% YoY on the back of increased construction revenue (+20%) as construction jobs secured in FY16 entered into advanced billings stages.

Outlook. YTD, KERJAYA has secured 6 new projects with a cumulative contract value of RM854m, which is still within our FY17E replenishment target of RM1.1b. Their outstanding order-book stands at RM2.9b giving them a visibility of c.2.5 years. Meanwhile, tender-book stands at RM1.2b of which we believe further project wins could likely stem from Dato’s Tee’s (KERJAYA’s major shareholder) private property arm that planning 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 KERJAYA could possibly undertake a 1-for-1 bonus issuance as the Companies Act 2016 states that share premium account will no longer be applicable from FY18 onwards and KERJAYA has a high share premium of RM333m vs share capital of RM258m (as of 2Q17).

Earnings forecasts. Post results, there are no changes to our FY17- 18E earnings of RM126.7-RM148.1m.

Maintain UNDERPERFORM with an unchanged TP of RM3.30. Post results, we maintain our SoP-derived TP of RM3.30 and reiterate our UP call as we feel that KERJAYA’s risk-to-reward ratio is no longer compelling given as its shares are trading at FY18 PER of 14.3x while also implying a FY18E construction PER of 15.0x – which we consider high given that it is above our ascribed range of 9-13x for small mid-cap contractors within our universe. Despite the declaration of a 25% minimum dividend policy, we keep our KERJAYA’s valuations unchanged given that a 25% DPR is still within our expectations of 30%. Furthermore, as highlighted in our report dated 2/8/17, we believe KERJAYA would only warrant a rerating with a DPR policy of >35%, which surpasses SUNCON’s existing 35% dividend payout policy that is currently the highest in the construction space. Note that we have pegged SUNCON to 16x construction PER due to their larger market cap of RM3.0b supported by a higher outstanding order-book RM4.6b which has visibility of c.3 years. That said, we believe further rerating catalyst for KERJAYA would be higher-than-expected replenishment/margins.

Source: Kenanga Research - 23 Aug 2017