KERJAYA had proposed for: (i) a bonus issue of 677.4m bonus shares on the basis of 6 bonus shares for every 5 existing shares, and (ii) 169.4m free warrants on the basis 6 free warrants for every 20 existing shares. Neutral as there is no change in fundamentals except improved share liquidity. No change to our FY17/18E earnings. Reiterate our UP call with unchanged SoP-derived cum/ex TP of RM3.40/RM1.55.

Bonus issue with free warrants. Yesterday, KERJAYA had proposed for (i) a Bonus issue of 677.4m Bonus Shares on the basis of 6 Bonus shares for every 5 existing shares and (ii) 169.4m free warrants on the basis 6 free warrants for every 20 existing shares. The tentative exercise price for the free warrants is at RM1.59 with tenure of 5 years. The corporate exercises are expected to be completed by 1Q18.

Neutral on exercises. We were not surprised by the proposed exercises as we have been anticipating it since mid-FY17. We remain neutral on the exercises as it has no fundamental change towards earnings/outlook of KERJAYA. That said, the proposed bonus issuance will improve the share liquidity that in turn provide for greater participation by the investment community.

Outlook. For FY18E, we are anticipating KERJAYA to clinch new wins of RM1.2b. To recap, they have secured RM1.4b contract wins in FY17 meeting our expectation of RM1.4b. 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.

Earnings unchanged. We maintain our FY17-18E earnings of RM127m/RM153m post announcement based on FY17E/FY18E replenishment target of RM1.4b/RM1.2b.

Maintain UNDERPERFORM with an unchanged cum/ex TP of RM RM3.40/1.55 as we believe that KERJAYA’s risk-to-reward ratio is no longer compelling as it is currently trading at FY18E PER of 15.1x implying a FY18E construction PER of 16x – 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 - 04 Jan 2018