2QFY20 CNP of RM11.6m brought 1HFY20 CNP to RM37.7m accounting for 33%/36% of our/consensus estimates. We deem the results as within expectation, anticipating a stronger 2H as construction activities are already almost in full swing since early July. We continue to like KERJAYA for their: (i) strong replenishment prowess, (ii) stable net cash despite growing top-line, and (iii) appealing ex-cash FY21E PER of 7.5x. Maintain OP with SoP-derived TP of RM1.45.

Within expectations. 2QFY20 CNP of RM11.6m brought 1HFY20 to RM37.7m – well within expectations despite only accounting for 33%/36% of our/consensus estimates. This is because the weakness seen in this quarter was largely expected due to the MCO lockdowns and we expect the subsequent two quarters to perform strongly to meet our full-year CNP estimate of RM106m. Our expectation for a stronger 2HFY20 is in-line with the pace of its construction activities which has ramped up to almost full capacity in early July. No dividends as expected.

We have stripped out: (i) losses from quoted investments worth RM1.4m, and (ii) allowance of ECL worth RM0.1m to derive our core profit.

Highlights. QoQ, 2QFY20 CNP of RM11.6m was down 56% stemming from the longer MCO period of 2 months vs. 2 weeks (in 1QFY20). Consequently, the sharp decrease in revenue (-40%) coupled with operating leverage effect resulted in a CNP margin squeeze (-3ppt). Unsurprisingly, 1HFY20 CNP was down 45% YoY due to the unprecedented MCO lockdowns.

Earnings’ visibility remains strong. Forward earnings will be driven by construction order-book of RM3.5b (as of June 2020) which provides c.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 RM3.0b. Our replenishment target is slightly more conservative vs. management’s target replenishment of RM1.5b.

Payment collection not an issue amidst this crisis. While KERJAYA’s clientele are private developers which may be facing tight cash flows during this hard times, management provided assurance that there are little hiccups with payment collections. Net cash in 2QFY20 remains healthy at RM185m (vs. RM191m in 1QFY20).

No change to earnings post 2QFY20 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) stable 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 - 28 Aug 2020