1Q19 CNP of RM35.1m came within expectations, making up 23%/22% of our/consensus full-year estimates. No dividend was declared. We make no changes to FY19-20E earnings. Upgrade to MP with an unchanged SoP-driven TP of RM1.20.

Results inline. 1Q19 CNP of RM35.1m came in within expectations, making up 23%/22% of our/consensus full-year estimates. No dividend was declared, as expected.

Results highlight. 1Q19 CNP improved by 8% YoY driven by improvements in: (i) revenue growth (+4%) from its construction, property division (+10%), (ii) lower financing cost (-29%), and iii) lower effective tax rate of 23% (-1ppt). In terms of operating performance, we note that the group recorded better operating margin of 17.4% (+0.5ppt) which we believe arose from better billings for higher margin jobs. QoQ, 1Q19 CNP grew 3% amid flattish revenue, also due to similar reasons above. Notably, its effective tax rate came down further from 26% to 23%.

Solid outstanding order-book. KERJAYA’s outstanding order-book remains fairly healthy at RM3.1b providing them at least 3-year’s visibility. To date, KERJAYA had won RM873.0m worth of jobs and is on track to meet our FY19E replenishment target of RM1.2b. We believe KERJAYA stands a good chance of winning more contracts in Penang, mainly from E&O’s Seri Tanjung Pinang 2 (STP2) project. Going forward, management is looking to launch another property project with an estimated GDV of RM250.0m in Shah Alam.

Earnings estimates. Post results, we make no changes to our FY19- 20E earnings.

Upgrade to MARKET PERFORM (from UNDERPERFORM) with an unchanged SoP-derived TP of RM1.20 pegged to unchanged valuation of 10.0x PER on FY20E construction earnings due to price retracement (-11%) since 24-Apr-19. 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 track record of “zero delay” project delivery coupled with superior margins compared to other players. Our SoP- derived TP implies a FY20E PER of 9.5x which is lower than our ascribed 10.0x valuation for its construction division as this is diluted by its property division, which was valued at 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 - 31 May 2019