KERJAYA’s outlook for job wins is bright, buoyed by limited competition for sizeable building jobs. It is optimistic of achieving its RM1.2b replenishment target and its ability to keep tabs on input cost and labour supply. We maintain our forecasts, TP of  RM1.50 and OUTPERFORM call.

We came away from KERJAYA’s 1QFY23 post-results briefing feeling reassured and the key takeaways are as follows:

1. The landscape has become less competitive for the RM300m – RM500m residential building job space as many main contractors currently lack the financial muscle to take on such large-scale jobs.  This benefits KERJAYA given its strong war chest with a net cash of  RM260m as at end-Mar 2023.

2. YTD, it has secured RM533.4m worth of contract and is confident of achieving its RM1.2b replenishment target (we target RM1.5b)  backed by RM1.5b-RM2.0b worth of tenders from: (i)  building/reclamation jobs from its sister companies i.e. E&O and  KPPROP, (ii) MNC industrial warehouse/factories alongside its JV  with Samsung, and (iii) third-party building jobs in the Klang Valley.

3. Despite the increasing prices of cement and cement-related products (i.e. concrete and cementitious materials used for plastering, skim coating, waterproofing), all other key building materials such as steel, aluminium, glass and other architectural products have seen a decline in prices YoY which more than offset the rising cement prices. KERJAYA is confident that it will be able to  keep tabs on input cost, enabling it to sustain its PAT margin at 10% currently, or to even bring it higher.

4. Its current workforce stands at c.4,000 workers after bringing in 530  workers during the last two months. It is expecting the arrival of another 1,100 workers over the next few months. A steady workforce of 4,000 to 5,000 will adequately support the execution of its outstanding orderbook of RM4.5b.

5. It is planning two property launches in 2HFY23, namely: (i) The Vue at Monterez Shah Alam and (ii) Papyrus at North Kiara (previously known as Yakin Land). KERJAYA has thus far put in >RM100m in substructure works. It expects the carpark floors to be build upon the official launch the projects.

We maintain our forecasts and SoP-TP of RM1.50 (see next page),  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 the high-rise building sector 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 ineclude: (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 - 25 May 2023