1QFY20 CNP came in within our expectation (25%) but below consensus (19%). The shortfall against consensus is likely due to street under-estimating the severe MCO impact on top-line and margins. Overall, we continue to like KERJAYA for their: (i) strong replenishment prowess, (ii) growing net cash despite growing top-line, and (iii) appealing ex-cash FY21E PER of 7.5x. Maintain OP and SoP-derived TP of RM1.45.

Within our but below consensus expectation. 1QFY20 CNP of RM26m came within our full-year expectation at 25%, but below consensus’ at 19%. Consensus may have underestimated the impact of MCO which led to lower-than-expected margins and progress billings. No dividends as expected. We have stripped out: (i) losses from quoted investments worth RM3.0m and (ii) allowance of ECL worth RM0.8m to derive our core profit.

Construction progress affected by MCO. 1QFY20 CNP of RM26.2m was down 37% QoQ on lower revenue (-21%) from two weeks of MCO disruption and higher effective tax rates (+11ppt). Likewise, 1QFY20 CNP was down 12% YoY for the same reasons.

Earnings visibility remains strong. Forward earnings will be driven by construction order-book of RM3.7b (as of March-2020) which provides 3.5x cover. YTD, KERJAYA has secured contracts valued at RM1.0b, in line to hit our target replenishment of RM1.3b backed by a tender-book worth RM3.5b. Our target is slightly more conservative vs. management’s target replenishment of RM1.5b.

2QFY20 would be the worst, but still profitable. In 2QFY20, which was when the MCO was at its peak, KERJAYA effectively only operated at one-third (1/3) of their normal level. After idling for the whole of April, most of their jobs have re-started work in May. Nonetheless, work progress was only at 30% of optimum level at the onset before gradually ramping up to a current rate of 90% (as of June-20). We are projecting 2QFY20 to register profit of c.RM10m before normalising back in 3QFY20.

Collections so far so good. While KERJAYA’s clientele are private developers which may be facing tight cash flows during this hard times management provided assurance that so far all their clients have not asked for works to be slowed down and payments have been prompt. Net cash remains healthy at RM191m (vs RM210m in 4Q19).

No change to earnings post 1QFY20 results.

Maintain OUTPERFORM with an unchanged SoP-derived TP of RM1.45. This is anchored by its construction segment of which we have attached a PE multiple of 12x (at 3-year mean) on FY21E earnings. We like KERJAYA for: (i) its strong replenishment prowess, (ii) growing net cash position despite growing top-line and (iii) trading at an appealing ex-cash FY21E PER of 7.5x.

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

Source: Kenanga Research - 1 Jul 2020