KERJAYA has clinched its first ever semiconductor factory construction job, from Texas Instrument through a JV with Samsung C&T. The latest job win has lifted its YTD replenishment slightly above our FY22F assumption of RM1.5b. While maintaining our forecasts, we increase our SoP-TP by 6% to RM1.50 (from RM1.42) after raising our earnings multiple for its construction segment to 13x (from 11x) to reflect its successful penetration into a new growth area, i.e. the construction of semiconductor factories. Maintain OUTPERFORM.

Maiden semiconductor factory contract. KERJAYA, via a 30:70 JV with Samsung C&T, has garnered a slice of action in the RM1.45b construction contract for Texas Instrument’s new factory in Taman Perindustrian Batu Berendam, Melaka (Free Trade Zone). The job win (with an effective share of RM436m going to KERJAYA) is significant to KERJAYA as this is its first construction job for a semiconductor factory it has ever secured. The contract period is 28 months ending March 2025.

We are positive on this new job which brings YTD replenishment to RM1.57b, surpassing slightly its FY22F new job target as well as our assumption of RM1.5b. The latest job win has also boosted its outstanding orderbook to an all-time high of RM4.7b. We expect this new contract to fetch c.10% margins, in line with our overall group assumption.

Outlook. For the remainder of the year, we do not anticipate further job win from the group. Meanwhile, the tight labour situation has eased with the arrival of 400-500 new workers (guided for 750 total by year-end) and we foresee construction works to ramp up in FY23 backed by KERJAYA’s record orderbook. We are targeting a flat replenishment of RM1.5b in FY23 underpinned by new job wins from: (i) its tender book worth c.RM1.5b, (ii) reclamation and building jobs from its sister companies E&O and KPPROP, and (iii) further semiconductor/data centre construction jobs with its partner Samsung.

While maintaining our forecasts, we increase our SoP-TP by 6% to RM1.50 (from RM1.42) after raising our earnings multiple for its construction segment to 13x (from 11x) to reflect its successful penetration into a new growth area, i.e. the construction of semiconductor factories. At 13x forward PER, we still value KERJAYA at a discount to the 14-18x we ascribe to medium and large cap contractors (Gamuda, IJM and Suncon). There is no adjustment to our TP based on a 3-star ESG rating as appraised by us (see Page 4).

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). 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 - 27 Oct 2022