KERJAYA has bagged its first win for 2019, a contract worth RM155m for a proposed development project in Cyberjaya. Neutral on the win as the contract value is within our replenishment target of RM1.2b for FY19.No changes to FY18-19E earnings. Downgrade to MARKET PERFORM from OUTPERFORM with unchanged SoP-driven Target Price of RM1.20.

Bags first 2019 contract. Yesterday, KERJAYA announced that they have been awarded a construction contract for a proposed development project in Cyberjaya worth RM155m from Aspen Entity SdnBhd, a subsidiary of HCK Capital Berhad. This is KERJAYA’s first job win in 2019. The scope of works comprise: (i) 2 blocks of 11-storey service suites on top of a 5-level car park podium, plus 2 levels of common area and facilities, as well as (ii) 1 block of 25-storey service suites on top of a 5-level car park podium and 2 levels of common area and facilities. The construction work is expected to commence on 1st March 2019 and completed within 24 months.

Within our assumptions. We are neutral on the win as the replenishment is within our FY19E replenishment target of RM1.2b. To recap, KERJAYA’s YTD replenishment stands at RM155m, which makes up 13% of our FY19E replenishment target of RM1.2b. Assuming a conservative pre-tax margin of 15%, we expect the project to contribute c.RM8.7m per annum to bottom-line over the next 2 years. The replenishment will bring its outstanding order-book to c.RM3.1b with 2-2.5 years’ visibility.

Outlook. Despite the lack of major infrastructure projects moving forward, we believe that KERJAYA would be the least affected contractor in town as they have zero exposure to government-related jobs as all of their construction jobs are from the private sector. Moving forward, we believe this contract win showcased the confidence HCK Capital Berhad, a reputable developer has towards KERJAYA’s delivery, which could result in more job wins. In the near term, we are still anticipating another replenishment worth c.RM400.0m from Dato’ Tee’s (KERJAYA’s major shareholder) private property arm as they are looking to launch a mixed development in Old Klang Road with a GDV of RM1.0b. As for the longer term, we believe that KERJAYA stands a good chance of winning more contracts in Penang mainly from E&O’s Seri Tanjung Pinang 2 (STP2) project as we believe more bridges are required to connect Penang Island and STP2.

No change to earnings estimates. Post contract award, we make no changes to our FY18-19E earnings of RM145.5-154.5m.

Downgrade to MARKET PERFORM (previously OUTPERFORM) with an unchanged SoP-derived TP of RM1.20 pegged to the unchanged valuation of 10.0x PER on FY19E construction earnings. The downgrade in our recommendation is mainly due to the recent share price rebound while we remain comfortable with our valuation basis at this juncture. Nonetheless, the valuation ascribed to KERJAYA is at the higher end of our small-mid caps’ PER range of 6-11x due to their excellent track record in project delivery without a single delay, better margins compared to the other players and total non-reliance on government jobs.

Risks to our call include: (i)higher-than-expected job wins, and (ii) higher construction margins.

Source: Kenanga Research - 18 Jan 2019