1HFY22 results missed expectations on weak progress billings due to labour shortages. We expect the situation to gradually improve from 2HFY22. For a start, KERJAYA expects the arrival of c.750 foreign workers over the next six months. We cut our FY22F earnings by 15% but maintain our SOP-based TP of RM1.42 which values its construction business at 11x FY23F PER. Maintain OUTPERFORM as we continue to like KERJAYA for its innovative and hence high-margin aluminium formwork construction method.

Below expectations. 1HFY22 CNP came below expectations at only 43%/44% of our/consensus full-year estimates. The variance against our forecast came largely from weak progress billings due to labour shortages.

YoY, 1HFY22 turnover increased by 26% from a low base during the pandemic-stricken period a year ago. CNP rose by a larger 37% on improved overhead absorption on a sharply higher topline.

Outlook. KERJAYA guided for improved labour situation from 2HFY22 with the arrival of c.750 Nepalese and Bangladeshi workers over the next six months. Ideally, it has to bring in another 1,500 foreign workers to cope with its high orderbook of RM4.3b, which could keep it busy for the next three years. In term of external orderbook replenishment, YTD, it has achieved RM1.13b, on track to meet our assumption which is also consistent with the company’s target of RM1.5b for full-year FY22. Over the remainder of the year, new job wins could come from: (i) its tender book worth c.RM1.5b; and (ii) building jobs from its sister companies E&O and KPPROP.

We cut our FY22F earnings by 15% to reflect slow progress billings due to labour shortages, but keep our FY23F earnings assuming the issue will be fully resolved by then. We maintain our SOP-based TP of RM1.42 which values its construction business at 11x FY23F PER, at a 40% discount to the 18x we ascribed to market leader GAMUDA to reflect: (i) weaker prospects for KERJAYA’s primary segment, i.e. building works, due to oversupply (as compared with infrastructure works); and (ii) its significantly smaller market cap. There is no adjustment to TP based on its 3-star ESG rating as appraised by us.

We continue to like KERJAYA for: (i) its innovative and hence high-margin aluminium formwork construction method, (ii) its hands-on management team with a strong track record in terms of project execution, and (iii) its competitiveness in the market, manifested in recurring external job wins, coupled with a steady flow of jobs from its sister companies. Maintain OUTPERFORM.

Risks to our call include: (i) further deterioration in the prospects for building jobs; (ii) rising input costs; and (iii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD).

Source: Kenanga Research - 23 Aug 2022