1H18 CNP of RM67.5m came below expectations, accounting for 44% of both our/consensus estimates. YTD, KERJAYA has secured 44% of our RM1.2b replenishment target and we think that our target is achievable, backed by RM1.0-1.5b of tender book stemming from related-party jobs. Toned down our FY18-19E earnings by 5-7% Maintain MP with a lower SoP-derived TP of RM1.50 (previously, RM1.60).

Below expectations. 1H18 CNP of RM67.5m was below expectations, making up 44% of our/consensus full-year estimates. The disappointment was due to lower-than-expected construction margins on the back of higher proportion of lower margin projects billings being recognised. 1.5 sen dividend declared, on track to meet our full-year expectations of 3.1 sen.

Results highlight. 1H18 CNP of RM67.5m increased 9% YoY driven by improvements in; (i) revenue backed by revenue growth from its construction (+10%), property division (+48%), and (ii) lower effective tax rate of 24% (from 28%). In terms of operating performance, we note that the group recorded lower operating margin of 16.8% (-2ppt) dragged down by higher billings recognised for lower margin construction jobs. 1Q18 CNP increased 8% QoQ in tandem with revenue growth of 9%, while operating margin remained flattish at 16.8%. In terms of divisional performance, its property development and manufacturing divisions registered PAT growth of 9-102% while its construction PAT came down by 20% as margin was compressed to 10.1% (-4.4ppt) due to similar reasons mentioned above.

Replenishment target on-track. For FY18, KERJAYA has secured c.RM500m worth of contracts (from BBCC and STP2) accounting for 42% of our RM1.2b targeted replenishment. We believe our targeted replenishment is achievable, backed by KERJAYA’s current tender- book of c.RM1.0-1.5b boosted by one that would likely be 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 with c.RM400m worth of construction contracts to be dished out in FY18.

Unbilled sales for Vista Genting currently stands at RM62m with current take-up of c.80% and management targets to complete and hand over the project in 4Q18. We note that KERJAYA plans to launch their Monterez Shah Alam (GDV: RM300m) project in FY19.

Earnings estimates. Post results, we lowered our FY18-19E earnings by 5-7%, as we fine-tuned our construction margins to reflect higher proportion of lower margins jobs while maintaining our FY18-19 replenishment target of RM1.2b each.

Maintain MARKET PERFORM with a lower SoP-derived TP of RM RM1.50 (from RM1.60) pegged to unchanged valuation of 12.0x PER on FY19E construction earnings. The valuation ascribed to KERJAYA is the highest in our small-mid cap PER range of 7-12x due to their strong delivery capabilities with no delays in project delivery coupled with decent margins compared to the other players.

Risks to our call include lower/higher-than-expected job wins, delay in construction progress and lower/higher-than-expected construction margins.

Source: Kenanga Research - 03 Sep 2018