KERJAYA’s 1HFY23 results met expectations. 1HFY23 net profit grew 5% YoY on improved construction work progress. We see stronger earnings momentum from 2HFY23 onwards as construction billings accelerate further coupled with new property launches. We maintain our forecasts but lift our TP by 2% to RM1.53 (from RM1.50). Maintain OUTPERFORM.

1HFY23 net profit came in at only 40% and 41% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as we expect a stronger 2HFY23: (i) as progress billings from its RM4.5b construction order book accelerate, and (ii) with contributions from two new property projects, namely, The Vue @ Monterez and Papyrus @ North Kiara.

It declared 2nd interim NDPS of 2.0 sen (ex-date: 07 Sept; payment date: 06 Oct) in 2QFY23, totalling 1HFY23 NDPS to 4.0 sen vs. 3.0 sen paid in 1HFY22.

YoY, both 1HFY23 revenue and net profit rose 5% on the back of improved progress of construction works. Its property unit posted a loss of RM0.4m mainly due to marketing expenses incurred pursuant to the soft launch of The Vue @ Monterez.

QoQ, 2QFY23 revenue rose 4% thanks to improved progress of construction works. However, net profit increased at a higher percentage of 7% due to lower administrative cost.

The key takeaways from its results briefing last Friday are as follows:

1. YTD, it has secured a total of RM1.3b worth of new jobs, on track to meet our full-year assumption of RM1.5b. The number includes two variation orders (VO) worth a total of RM300m, namely: (i) RM100m from the widening of E&O’s bridge to Andaman Island from 4 lanes to 8 lanes, and (ii) RM200m from the building job for a US-based chip maker’s plant in Melaka via 30%-owned Samsung-Kerjaya JV. The company has a full-year job win of RM1.2b (excluding VOs).

2. Currently, its outstanding order book stands at RM4.5b with tender book at between RM1.5b to RM2.0b.

3. The Vue @Monterez has achieved a 40% take-up (of which 25% with signed SPAs) while the RM500m Papyrus @ North Kiara is expected to hit the market in 4QFY23 with an indicative price from RM600k/unit.

Forecasts. Maintained.

We raise our SoP-based TP by 2% to RM1.53 (from RM1.50), having rolled forward our valuation base year to FY24F (from FY23F) with an unchanged 13x forward PER for construction business and a 30% discount to RNAV of its property project (see Page 3). We value its construction business at a discount to the 14x-18x PER we ascribed to mid-sized and large contractors given KERJAYA’s significant exposure to the high-rise building sector currently weighed down by an oversupply situation 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 5).

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 - 21 Aug 2023