We reduce our FY22E/FY23E earnings forecasts by 14%/6% and lower our SoP-TP to RM1.42 (previously RM1.50) anchored to unchanged construction PER of 11x – a 40% discount over our sector leader’s ascribed PER of 18x given KERJAYA’s orderbook profile that is skewed towards building works (of which prospects are weighed down by supply overhang). We also roll forward our valuation base year to FY23 (from FY22). Maintain OUTPERFORM.

The key takeaways from our recent engagement with KERJAYA are as follows:

1. KERJAYA’s recent JV with Samsung will likely tender for the reclamation works at STP2 (valued at RM1.2b-1.5b) as Samsung possess regional reclamation experience in Korea, Singapore and Hong Kong. In addition, the JV is keen to participate in other infra projects such as airports and seaports.

2. KERJAYA sees competition easing in high-rise building jobs. Many competitors are not actively bidding for new jobs at present as they are struggling to manage their cashflow as a result of over-bidding during the pandemic coupled with a surge in input costs.

3. It is not spared the industry-wide labour shortage problem. KERJAYA currently boasts a labour force of 3-4k workers. Ideally, to cope with its high orderbook of RM4.3b (revenue cover of 3.5x), it needs 2-3k more.

4. Amidst the labour shortage, it guided for a high single-digit to low double-digit construction PAT margin (9-12%), vs. 11-14% prior to the pandemic.

5. For the two property development projects in the pipeline, i.e. Monterez (GDV: RM250m) and Yakin Land (GDV: RM380m), KERJAYA has started foundation works (worth c.RM100m) ahead of the official launch by the end of the year. It guided for a PAT margin of 20-30% from the projects.

Changes in assumptions. We reduce our FY22E/FY23E earnings forecasts by 14%/6% respectively to reflect: (i) a lower average construction PAT margin of 10% (from 11%) on higher cost to obtain labour, and (ii) a lower contribution from the two property projects which launching has been delayed slightly. Meanwhile, its YTD construction job wins stand at RM1.13b, on track to meet its guidance as well as our assumption of RM1.5b for the full year.

We see the various headwinds KERJAYA currently faces as being temporary. We continue to like KERJAYA for: (i) its innovative construction solutions and lean cost structure that translate to above- average margins; (ii) its hands-on management team and track record of strong execution; (iii) its ability to consistently win external jobs and the availability of job orders from related parties (E&O, KPPROP).

Risk to our call includes: inability to replenish depleting orderbook, project cost overrun and liabilities arising from liquidated ascertained damages (LAD).

Source: Kenanga Research - 27 Jun 2022