KERJAYA has secured the RM398m coastal protection structure job for Seri Tanjung Pinang Phase 2 (STP2). We are mildly positive on this win which raised its YTD replenishment to RM464m and lifted its outstanding order book to an all-time high of RM4.7b. We continue to like KERJAYA for its innovative and hence, high margin construction methods. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

Second contract for the year. Kerjaya has secured a RM398m contract from Tanjung Pinang Development S/B to undertake construction works for a coastal protection structure at Phase 2B and 2C at Seri Tanjung Pinang, Penang. This 36-month contract will commence from 10 April 2023.

We are mildly positive of this win which has raised its YTD replenishment to RM464b, accounting for 31% of our FY23F replenishment target of RM1.5b and lifted its outstanding order book 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.

Major reclamation works at STP2 yet to be awarded. The bulk of the reclamation works at STP2 which involves sand filling and foundation strengthening for the upcoming coastal protection structure (which will act as a perimeter for the reclaimed island) is still not awarded. Based on the 507 acres to be reclaimed, we estimate the remaining reclamation works to be worth c.RM1b with KERJAYA being a strong contender for the job.

We maintain our forecasts and SoP-TP of RM1.50 backed by its construction PER of 13x, at a discount to the 14-18x we ascribed to medium and large cap contractors (Gamuda, IJM and Suncon) as KERJAYA’s order book still predominantly comprises high-rise building jobs which faces a national oversupply issue. There is no adjustment to our TP based ESG given 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, and (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 - 8 Feb 2023