Post a management meeting, we believe our FY20/21 earnings estimates of RM91m/132m are well intact despite marginal reduction in productivity from MCO 2.0. Other notable takes include: (i) manageable steel prices, (ii) replenishment guidance of RM1.0b to RM1.5b, (iii) new solar venture, and (iv) eyeing of land deals within Klang Valley. Overall, reiterate OP with TP of RM1.50.

Slightly impacted by MCO 2.0. MCO 2.0 has limited Kerjaya’s construction productivity to 70-80% currently compared to 80-90% recorded in 4QFY20 during the CMCO. The main obstacle faced during this period is the strict movement of labour force. That said, receivables risks continue to remain low as management reassured that there are little hiccups with collections.

Steel prices still manageable. The spike in steel rebar prices seen in January 2021 from RM2,300/tonne to RM2,700/tonne is viewed as unsustainable and should retrace along with the falling iron ore prices. For now, management has indicated that margins remained protected as existing rebar inventories should last till Mar-21 (i.e. 2 months) without the need to purchase at these current high prices. For sensitivity, every RM100/tonne fluctuation of steel bar prices will have an impact of c.RM5m to bottom-line (or 4% of FY21 earnings).

Tender landscape for buildings has shifted to: (i) smaller scale jobs of RM100-200m vs. RM400-500m previously, (ii) more medium-cost homes, and (iii) developers’ seeking further design alternatives from contractors to help reduce costs.

That said, management is still guiding for a healthy RM1.0b to RM1.5b worth of replenishments – in line with ours of RM1.2b. Potential awards are backed by: (i) c.RM400-500m worth of related party transactions i.e. KPPROP, E&O, and the remainder from (ii) new and existing clients. Outstanding order-book remains strong at RM3.6b (3.5x cover).

Starting small in solar. Kerjaya has ventured into the solar space by setting up a 51:49 JV with a partner for: (i) EPC works and (ii) Build- Own-Operate (BOO) schemes for industrial and commercial projects. Currently, the group has committed up to RM12m for the BOO initiatives with plans to gradually grow this segment – through organic and inorganic means. While bottom-line impact is negligible in the immediate term, we are positive for the group to pivot into this growth segment.

Land deals for grabs. With abundant of appealing land deals in the current climate, Kerjaya has indicated interest to mobilize their existing net cash position to snap up attractive land deals in the Klang Valley region. We view this positively as Kerjaya can leverage their strong balance sheet for lands which will see quick turnover which will provide higher returns instead of keeping its cash idle.

4QFY20E earnings to be announced on the 25th Feb - likely to come in within our/consensus forecasts of RM29m each – achieving FY20 CNP of RM91m.

Meanwhile, despite impact from MCO 2.0 we maintain our FY21E earnings forecasts as we had already reduced our earnings forecasts to impute the sub-optimum productivity anticipated for 1HFY21 back in Nov 2020 in our 3rd quarter earnings note. That said, we believe that consensus FY21E earnings of RM141m could see some downside.

Reiterate OUTPERFORM on unchanged SoP-derived TP of RM1.50 anchored by a 13x Fwd PER at its construction segment.

Source: Kenanga Research - 4 Feb 2021