KERJAYA has secured its third contract for the year worth RM438.8m - a proposed mixed development project at Jalan Puchong. We are neutral on the win given that the contract value is within our replenishment target of RM1.2b for FY19. No changes to FY19-20E earnings. Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged SoP-driven Target Price of RM1.20, implying FY20E PER of 9.5x.

Third win of the year. KERJAYA announced that they have secured a contract worth RM438.8m for the construction of main building works for a proposed mixed development project at Jalan Puchong. This represents KERJAYA’s third win for 2019. The scopes of work comprise: (i) 1 block of 25-storey of offices and hotel and 2 blocks of 53-storey services apartments on top of an 11-storey podium, as well as (ii) 4-level basement car park. The construction work is expected to commence on 2 May 2019 and completed within 42 months.

Neutral on the win. We are neutral on the win as the contract falls within our FY19E order-book replenishment of RM1.2b and we had anticipated this replenishment from Dato Tee’s (KERJAYA’s major shareholder) private property arm in FY19, as highlighted previously. To recap, in 1Q19, KERJAYA had earlier secured RM435m worth of contracts. This new job win brings KERJAYA’s YTD replenishment to RM874m, making up 73% of our FY19E replenishment target of RM1.2b. Assuming a pre-tax margin of 15%, the project is expected to contribute an aggregate of c.RM49.4m to the bottom-line. The replenishment will bring its outstanding order-book to c.RM3.7b providing 2.5-3.0 years’ visibility.

Not an immediate beneficiary of infrastructure projects revival... In the past few months, the construction space has seen some positive catalysts, particularly in terms of infrastructure projects, with the recent talk of the town, i.e. revival of East Coast Rail Link (ECRL). However, we are less excited with the above-mentioned project as highlighted in our recent construction sector report dated 16-Apr-2019. Nonetheless, KERJAYA, being a high-rise player is not an immediate beneficiary given its portfolio of projects that has zero government jobs and hence, is unlikely to see contracts from those projects. On the other hand, in the longer term, we opine that KERJAYA could stand a chance of winning more contracts in Penang, mainly from E&O’s Seri Tanjung Pinang 2 (STP2) project.

No change to earnings estimates. We make no changes to our FY19- 20E earnings of RM154.3-157.3m.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged SoP-derived Target Price of RM1.20 pegged to10.0x PER FY20E construction earnings, and 5.0x property earnings (previously, it was pegged to FY19E construction and property earnings) as we roll forward valuation base to FY20E. There are no changes to our Target Price of RM1.20 as its earnings growth prospect is unexciting. Our Target Price implies FY20E PER of 9.5x. 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 delay and better margins compared to the other players. We believe our downgrade is timely given its YTD gains of 16.5%, pushing its valuation to the higher-end of small-to-mid caps' PER band despite offering unexciting earnings prospects.

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

Source: Kenanga Research - 24 Apr 2019