KERJAYA has secured a RM275.3m building contract from sister company E&O (Not Rated). This brings its YTD job wins to RM1.25b and outstanding order book to RM5.0b. We keep FY24F forecast but uplift FY25F forecasts by 4% and TP by 4% to RM2.24. OUTPERFORM maintained.

KERJAYA has been awarded a RM275.3m contract by sister company E&O for building works for a proposed 50-storey service apartment in Bandar Tanjung Pinang, Pulau Andaman, Penang. The contract shall commence in Jan 2025 with a construction period of 38 months We are positive on the latest contract win, its 7th in FY24, boosting its YTD new job wins to RM1.25b (against our full-year FY24 assumption of RM1.5b) and outstanding order book to RM5.0b.

Meanwhile, its tender book stood at RM2.0b-RM3.0b, comprising largely building jobs (with half of them coming from related parties). While this year’s jobs have been from related parties so far, it is also eyeing two to three industrial projects worth a total of more than RM1b.

Forecasts. We raise our FY24 job win assumption to RM1.6b from RM1.5b, following this RM275.3m contract win, but keep our FY25 job win assumption unchanged at RM1.6b. As the commencement of this new contract is from Jan 2025, our new job win assumption is only expected to reflect in its revenue recognition from FY25F onwards, thus we keep our FY24F earnings forecasts but raise our FY25F forecasts by 4% to RM203.4m.

Valuations. Post earnings revision, we increase our SoP-TP by 4% to RM2.24 (see next page) from RM2.16, valuing its construction business unchanged at 16x forward PER, at a discount to the 20x we ascribed to large contractors (i.e. GAMUDA, IJM, and SUNCON) given KERJAYA’s focus on the high-rise building sector which is 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 4).

Investment case. We continue to like KERJAYA for: (i) its innovative and hence high-margin formwork construction method (c.10% net margin), (ii) its lean and hands-on management team with a strong execution track record, (iii) its strong earnings visibility underpinned by a sizeable outstanding order book and recurring orders from related companies (such as E&O, KPPROP) for at least RM1b a year. Maintain OUTPERFORM. The stock also offers attractive dividend yields of >5%.

Risks to our call include: (i) deterioration in the prospects for building jobs, (ii) rising input costs, and (iii) liquidated ascertained damages (LAD) from cost overrun and delays.

Source: Kenanga Research - 20 Aug 2024