• Keep BUY, with new MYR1.56 TP from MYR1.52, 33% upside and c.4% yield. Kerjaya Prospek secured a MYR265m contract from Persada Mentari, an indirect subsidiary of Eastern & Oriental (EAST MK, SELL, TP: MYR0.48), to undertake main building works for a proposed residential development project located at Kawasan Terbusguna Tanah Seri Tanjung Pinang (Phase 2A), Penang, entailing 1,020 units consisting of two blocks of apartments. The proposed development project is expected to commence on 1 Jul 2022 for a period of 32 months.

• Impact to orderbook. This latest contract win marks the third job secured in FY22 by the group, bringing its construction orderbook to MYR4.4bn. This translates into an orderbook/revenue cover ratio of 4.6x – higher than the average of 2.5x of listed contractors under our coverage. More importantly, this third job award brings YTD job wins just MYR27m shy of the group’s FY22 job replenishment target of MYR1.2bn.

• Raw material price headwinds. The group acknowledged headwinds in the form of elevated raw material costs ie prices of steel bars and concrete, which have risen by 10-30% since the start of this year. Moving forward, KPG may resort to price in the increased input costs accordingly into new tenders to prevent margin erosion while facing compression in the previously won contracts. Other efforts include leveraging on its strong cash position to negotiate with suppliers to obtain more favourable prices.

• Earnings estimates. We adjust our FY22F-24F earnings upwards by 2%, 1%, and 2% as we revise our FY22 job assumptions to MYR1.6bn (from MYR1.2bn). Meanwhile, we leave our job replenishment assumptions for FY23 and FY24 unchanged at MYR1bn and MYR800m. With more than eight months left before FY22 ends, we think that KPG still has room to win more job contracts given its net cash position as at 4Q21.

• Valuation. We maintain our target P/E of 11x, which is a 10% discount to KLCON Index’s forward P/E ascribed to the construction segment in our SOP valuation to reflect pressure from high input costs. Post earnings revision, we derive our new TP of MYR1.56 after applying a 0% ESG premium/discount to our SOP-derived intrinsic value, based on our in-house ESG proprietary scoring methodology. Overall, we favour the stock for its ability to consistently replenish its outstanding orderbook. Valuation of the stock is also undemanding, trading at an attractive 9x 2022F P/E – below its 5-year mean of 13x.

• Key downside risks: Margin erosion from increasing competition, higher raw material cost pressures, and lower-than-expected new contract wins.

Source: RHB Research - 7 Apr 2022