KERJAYA’s 9M17 CNP of RM96.2m is within both our and consensus’ expectations at 76%. No dividends declared as expected. Separately, KERJAYA clinched a contract award worth RM245m of which we are positive given that YTD replenishment of RM1.4b has now surpassed our FY17E target of RM1.1b. Upgrade FY17-18E earnings by 0.5-3.2% after imputing the new contract award. Maintain UP with higher SoP-derived TP of RM3.40.

Results Inline. 9M17 CNP of RM96.2m is within expectations, making up 76% of both our and consensus’ full-year estimates. No dividends declared as expected. Separately, KERJAYA announced a new building contract from B.U. Developments S/B worth RM245m slated for delivery by Nov 2021 (48 months). The construction works for Triuni Residences of Batu Uban comprises 3 towers of residential high-rise (total of 552 units of condominium).

Results highlight. 9M17 CNP was up by 30% YoY due to: (i) higher revenue (+23%) from higher construction billings, and (ii) improved construction margins (+1ppt) from better margin jobs. 3Q17 CNP of RM34.4m was up 5% QoQ despite the slight decline in revenue (-4%) due to: (i) better property development margins (+10ppt), and (ii) lower effective tax rate (-13ppt).

New contract surpassed replenishment target. We are positive on the new contract given that YTD win of RM1.39b has surpassed our FY17E replenishment target of RM1.1b. Assuming PBT margins of 16%, the contract is expected to contribute c.RM7.4m/annum towards bottom-line.

Outlook. Currently, KERJAYA’s outstanding order-book stands at RM3.2b giving them a visibility of c.2.5-3.0 years. Meanwhile, its tender- book stands at c.RM1.0b. 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 construction contracts likely to be dished out in FY18. In addition, 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 substantial share premium of RM331m vs. share capital of RM311m (as of 3Q17).

Earnings forecasts. Post-results, we upgrade our FY17-18E earnings by 0.5-3.2% after accounting for the new contract win where we adjust our FY17E replenishment higher to RM1.4b (from RM1.1b). That said, we keep our FY18E replenishment target of RM1.2b unchanged.

Maintain UNDERPERFORM with a higher TP of RM3.40. While we upgrade our SoP-derived TP to RM3.40 (from RM3.30), we reiterate our UP call as we believe that KERJAYA’s risk-to-reward ratio is no longer compelling as its share price is up 84% YTD and currently trading at FY18E PER of 14.8x implying a FY18E construction PER of 15.5x – which we consider high as it is above our ascribed range of 8- 13x for small mid-cap contractors within our universe. We believe further rerating catalyst for KERJAYA could be higher-than-expected replenishment or profit margin.

Source: Kenanga Research - 23 Nov 2017