KERJAYA announced that they have bagged a new building project worth RM291m from Bon Estates S/B called ?The Estates? in Bangsar South slated for delivery in May 2020. We are NEUTRAL on the contract despite its YTD wins surpassing our replenishment target as it is only slightly above our target at 104%. Hence, there is no change to our earnings estimates. Maintain UP with an unchanged TP of RM3.30.

?The Estates? project. Yesterday, KERJAYA announced that they have secured a new building project worth RM291m from Bon Estates S/B. This project also known as ?The Estates? encompasses construction of the main building, hardscape works, external works and other ancillary works for 2 towers of residential high-rises with 46 storeys each totalling 328 units of condominium along with a 3-storey podium for recreational facilities to be built on top of a 4 and a 1/2 level basement car park at Bangsar South, Selangor, slated for delivery in May 2020 (32 months).

NEUTRAL on contract. Despite KERJAYA?s YTD wins of RM1,145m surpassing our RM1.1b FY17E replenishment target, we remain NEUTRAL given that it is only slightly above our target, accounting for 104% of full-year target. Also, note that we are entering the tail-end of FY17 and this contract is still within our FY18E replenishment target of RM1.2b. However, should KERJAYA clinch another major contract with value exceeding RM200m by year-end, we would look to adjust our FY18E replenishment assumption upwards. Assuming pre-tax margin assumption of 16%, this newly won contract will contribute c.RM13.1m to KERJAYA?s bottom-line/annum.

Outlook. Currently, KERJAYA?s outstanding order-book stands at RM3.15b giving them a visibility of c.2.5 years. Meanwhile, tender-book stands at c.RM0.9b while we believe further project wins could likely stem from Dato?s Tee?s (KERJAYA?s major shareholder) private property arm that is 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 which would likely happen in FY18. Besides that, we believe KERJAYA could possibly undertake a 1-for-1 bonus issue 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 award, there are no changes to our FY17- 18E earnings of RM126.7-148.1m. Nonetheless, we note that should KERJAYA secure another major contract exceeding RM200m, we will look to upgrade our FY18E replenishment of RM1.2b to RM1.4b which would increase FY18E CNP by 5.5% to RM156m. Tentatively, this would increase our TP to RM3.45 based on unchanged valuations which still commands an UP call based on today?s closing price.

Maintain UNDERPERFORM with an unchanged TP of RM3.30. 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 as its share price is up 79% YTD and trading at FY18 PER of 14.8x and also implying a FY18E construction PER of 15.5x ? 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 further rerating catalyst for KERJAYA are higher-than-expected replenishment/margins.

Source: Kenanga Research - 19 Sep 2017