KERJAYA has bagged two earthworks and infrastructure contracts from related-party company E&O which are worth a total of RM46m. We are positive on this development as it raised KERJAYA’s YTD new wins to RM984m and its outstanding order book to RM4.4b. We continue to like KERJAYA for its innovativeness that is translated to high-margin construction methods. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

KERJAYA has been awarded two related-party contracts worth a total of RM46.0m from E&O’s (Not Rated) indirect subsidiaries, i.e.: (i) RM24.7m from Eastern & Oriental Express Sdn Bhd for earthworks for a proposed mixed development (known as Elmina) located at Section U17, Shah Alam, and, (ii) RM21.3m from Persada Mentari Sdn Bhd for infrastructure works for the proposed Seri Tanjung Pinang Phase 2A Development in Penang. The completion timeline for the first contract is expected to be 17 months from the scheduled commencement date of 01 Oct 2023 while the second contract is anticipated to be completed within 12 months from 18 Sep 2023.

We are positive on this win which brings its YTD total wins to RM984m or 66% of our FY23 target and firmly on track to hit our FY23F full-year job win assumption of RM1.5b. It also raised its outstanding order book to RM4.4b. We expect these contracts’ PAT margin to be 10%.

Currently, its tender book stands at c.RM1.5b-RM2.0b 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.

Forecasts. Maintained as these two contract wins are still within our job win assumptions.

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 that we ascribe 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 an oversupply in the office and 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 - 2 Aug 2023