FY18 CNP of RM138.4m came in within expectations, making up 95%/98% of our/consensus full-year estimates. No dividend was declared, but we are expecting management to declare another 1.5 sen at a later date, bringing the full-year dividends to 3.0 sen. No changes to FY19E CNP, introduce our FY20E CNP of RM157.3m. Maintain MP with an unchanged SoP-driven TP of RM1.20.

Results inline. FY18 CNP of RM138.4m came in within expectations, making up 95%/98% of our/consensus full-year estimates. No dividend was declared, but we are expecting management to be declaring another 1.5 sen on a later date, bringing the full-year dividends to 3.0 sen.

Results highlight. FY18 CNP increased 11% YoY driven by improvement in; (i) revenue growth (+12%) from its construction (+10%), property division (+32%) as billings for its on-going projects continued to pick up pace, (ii) lower financing cost (-11%), and (iii) lower effective tax rate of 24% (-1ppt). In terms of operating performance, we note that the group recorded lower operating margin of 17.8% (-0.7ppt) which we believe was dragged down by higher recognition of lower margin construction jobs. As for 4Q18, its CNP fell 8%, QoQ, underpinned by several factors such as; (i) decrease in revenue (-2%), (ii) incurred finance cost of RM6.8m compared to a finance income of RM0.3m in 3Q18, and (iii) higher effective tax rate of 26% (+2ppt). In terms of divisional performance, all its division PAT registered growth ranging from 7% to 391%.

Solid outstanding order-book. KERJAYA’s outstanding order-book remains fairly healthy at RM3.0b providing them easily 3-year visibility. 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 for mixed development at Old Klang Road which should set KERJAYA on track to meet our FY19E replenishment target of RM1.2b. As for the longer term, we believe KERJAYA stands a good chance of winning more contracts in Penang, mainly from E&O’s Seri Tanjung Pinang 2 (STP2) project.

Earnings estimates. Post results, we make no changes to our FY19E earnings of RM154.5m and introduce our FY20E earnings estimate of RM157.3m.

Maintain MP with an unchanged SoP-derived TP of RM1.20 pegged to unchanged valuation of 10.0x PER on FY19E construction earnings. The valuation ascribed to KERJAYA is at the higher-end of our small- mid cap PER range of 6.0-11.0x due to their strong delivery capabilities with no delays in project delivery coupled with fatter margins compared to other players. Based on our SoP-derived TP, it implies a 9.7x FY19E PER which is lower than our ascribed 10.0x to its construction division as it is diluted by its property division which we ascribed a lower multiple of 5.0x.

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

Source: Kenanga Research - 01 Mar 2019