KERJAYA’s 1QFY23 results met expectations. YoY, it reported a  slight improvement in EBIT as contributions from new projects secured at better rates (reflecting the higher cost of various inputs) more than offset higher labour cost. YTD, it has secured  RM0.5b worth of jobs, on track to meet our full-year target of RM1.5b. We maintain our forecasts, TP of RM1.50 and  OUTPERFORM call.

Within expectations. 1QFY23 core net profit of RM29.4m only made up 20% each of both our full-year forecast and the full-year consensus estimate. However, we consider the results within expectations as we expect strong quarters ahead as: (i) progress billings from its RM4.5b order book accelerate, and (ii) it will put onto the market two new property projects with immediate contributions. 1QFY23 dividend declared of 2.0 sen is on track to meet our full-year forecast of 6.0 sen.

YoY, 1QFY23 turnover eased 1% due to slower progress of works despite the higher number of jobs on hand. Nonetheless, EBIT  improved 2% as contributions from new projects secured at better rates  (reflecting the higher cost of various inputs) more than offset the higher labour cost. Due to marginally higher financing costs and effective tax rate (+1ppt), core net profit came in flat.

QoQ, 1QFY23 turnover increased 3% from higher progress of construction work activities. Nonetheless, gross profit contracted 21%  from a high base in the preceding quarter (due to recognition of certain lumpy cost savings). Core net profit rose 2% on higher other incomes but offset by lower administrative and financing costs, as well as a  reduced effective tax rate.

YTD, KERJAYA has secured RM533.4m worth of jobs, on track to meet our RM1.5b target (vs company’s more conservative target of RM1.2b).  It has strong replenishment prospects from: (i) building jobs by its sister companies i.e. E&O and KPPROP, (ii) industrial warehouse/factories,  and (iii) MNC factories from its JV with Samsung.

Meanwhile, it will put onto the market by 2HFY23 two new property projects, i.e. Monterez Shah Alam and Yakin Land with a total GDV of  RM630m. As it has already started the sub-structure works, buyers could be billed almost immediately upon launching.

We maintain our forecasts and SoP-TP of RM1.50, valuing its construction business at 13x forward PER, at a discount to 14x-18x we ascribed to mid-sized and large contractors (i.e. GAMUDA, IJM and  SUNCON), as KERJAYA’s focus is on high-rise building jobs of which prospects are currently weighed down by oversupply, both in the office as well as residential segments. There is no adjustment to our TP  based on 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 - 24 May 2023