KERJAYA’s 9MFY23 results disappointed due to the cancellation of a contract. Nonetheless, its 9MFY23 core net profit rose 13% YoY thanks to improved construction billings and property profits. We cut FY23-24F by 10-4%, trim our TP by 4% to RM1.67 (from RM1.75) but maintain our OUTPERFORM call.

KERJAYA’s 9MFY23 core net profit disappointed, coming in at only 64% and 68% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from the cancellation of the RM404.4m building job awarded by ECOFIRS (Not Rated). The contract was awarded back in Jun 2023 and was supposed to commence in Aug 2023. No work has been done thus far and hence provision does not arise. KERJAYA will take the necessary steps to enforce its right to recover the preagreed damages stated in the letter of award.

It declared 3rd interim NDPS of 2.0 sen (ex-date: 14 Dec 2023; payment date: 12 Jan 2024), totalling YTD 9MFY23 NDPS to 6.0 sen, vs 4.0 sen paid in 9MFY22. This beat our forecast in which we expect a full-year FY23 NDPS of 6.0 sen only.

YoY, its 9MFY23 revenue rose 16% on higher construction and property billings (largely from its new project The Vue @ Monterez). Its core net profit only rose 11% due to slight cost pressure.

QoQ, its 3QFY23 revenue and core net profit grew 17% and 13%, respectively, on accelerated construction and property billings, coupled with the turnaround of the property division with a net profit of RM2.8m in the absence of lumpy cost vs. a RM0.4m net loss three months ago due to lumpy marketing expenses incurred pursuant to the soft launch of The Vue @ Monterez.

The key takeaways from its results briefing are as follows:

1. YTD, it has secured a total of RM1.6b worth of new jobs, including the cancelled RM404.4m ECOFIRS contract secured in June. Stripping out this contract, YTD total contracts secured of RM1.2b still hits its in-house target of RM1.2b.

2. Currently, its outstanding order book stands at RM4.7b (including the ECOFIRS contract) with tender book of RM2.0b. Out of the RM4.7b orderbook, 43% or RM2.0b is related party transactions (RPT). The RPT is expected to make up 60%-70% by FY25. KERJAYA expects a job win worth RM1.5b for FY24.

3. The construction sector as a whole still have to deal with rising input costs but the labour shortage is already resolved as the supply of foreign labour normalises. Currently, KERJAYA has a total workforce of 7,000, including 3,000 carried by its subcontractors.

4. It continues to jointly seek for new jobs with Samsung C&T via Samsung-KERJAYA JV focusing on factory construction locally. Also, there are opportunities in infrastructure work from RPT’s Andaman Island amounting to RM2b.

Forecasts. We cut FY23/FY24F earnings by 10%/4% to account for the cancellation of the ECOFIRS contract. We have also lowered our job win assumption of RM1.7b and RM1.6b for FY23/FY24 to RM1.2b/1.5b. However, we raise our NDPS assumptions to 8.0 sen and 10.0 sen for FY23 and FY24F, respectively from previously 6.0 sen for both years.

Correspondingly, we trim our SoP-based TP downward by 4% to RM1.67 (see Page 3) from RM1.75, valuing its construction business at an unchanged 14x FY24 PER, at a discount to 18x we ascribed to large contractors i.e., GAMUDA (OP; TP: RM5.45), IJM (OP; TP: RM2.15) and SUNCON (OP; TP: RM2.26) given KERJAYA’s focus on the high-rise building sector currently weighed down by 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 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 - 22 Nov 2023