KERJAYA’s 1HFY24 results met expectations with 1HFY24 core profit growing 16% YoY to RM70.6m on higher construction billings and property sales. Its PAT margin slid to 9.6% from 10.1% in 1HFY23 given more progress billings due to a lower margin JV project with Samsung. We keep our forecast, TP of RM2.24 and OUTPEFORM call.

1HFY24 inline. While KERJAYA’s 1HFY24 core profit of RM70.6m made up only 40%/41% of house/street’s full-year forecast, we consider the results within expectations as we expect stronger earnings in 2HFY24 as it has been the case historically. It declared a 2nd interim NDPS of 2.5 sen in 2QFY24, (ex-date: 17 Sep; payment date: 09 Oct), raising 1HFY24 NDPS to 5 sen (1HFY23A: 4 sen), on track to meet our full-year forecast of 10 sen.

YoY. Its 1HFY24 revenue rose leapt 21% to RM732.6m, on higher billings from construction (+16%) while property contributed RM27.2m (vs. nil in 1HFY23) from its new projects, namely The Vue @ Monterez and Papyrus @ North Kiara. Correspondingly, its core profit rose 16% to RM70.6m.

QoQ. Its 2QFY24 core profit grew 11% to RM37.1m on the back of 17% hike in revenue to RM395.4m. This was attributable to improved progress of construction works activities especially for the JV job partnering with Samsung. However, profit margin for this JV job is below its usual 10% net profit. This led to a slower earnings growth rate as its PAT margin slid to 9.4% from 10.0% previously.

The key takeaways from its results briefing are as follows:

1. YTD, it has won seven new jobs worth a total of RM1.25b, on track to meet its FY24 job win target of RM1.5b (which is also our assumption). All the seven new jobs are related-party transactions (RPT) including three from E&O (Not Rated) and one from KPPROP (Not Rated). Currently, its outstanding order book stands at RM4.4b with 25 on-going projects.

2. Its current tender book of c.RM4b comprises RM2b building jobs (70% are RPT) and three industrial jobs including data centre bid worth RM2b. It believes that PAT margin of data centre job is less than 10% due to steep competition. KERJAYA is not keen to bid for external infrastructure job.

3. The take-up rate for its The Vue @ Monterez (GDV of RM300m) remains slow at 70% currently from slightly above 60% three months ago. The newly launched RM500m GDV of Papyrus @ North Kiara has achieved 30% take-up rate since its soft launch on 16 March 2024.

Forecasts. Maintained.

Valuations. We maintain our SoP-TP of RM2.24 (see Page 3) valuing its construction business at 14x 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, 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).

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) of at least RM1b a year. Maintain OUTPERFORM. The stock also offers attractive dividend yields of >5%.

Risks to our call include: (i) further 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 - 28 Aug 2024