• Keep BUY, new MYR1.45 TP from MYR1.56, 25% upside with c.3% yield. 1Q22 core earnings missed our and Street’s estimates at 17% and 21% of full-year projections. The negative deviation came from the 14.7% YoY rise in cost of sales amid pricier building materials. Yet, the outlook remains positive – the MYR1.5bn orderbook replenishment target could likely be within reach amidst Kerjaya Prospek’s lean balance sheet, coupled with the launch of property development projects by 1H22 with a combined estimated GDV of MYR630m.

• Results review. The construction segment recorded a PAT of MYR28.2m (+15.3% YoY) in 1Q22 on revenue of MYR297.7m (+11.5% YoY) amid higher progress billings from increased construction activities. Conversely, the property development segment saw a 3% YoY PAT growth during this quarter amid absence of new development projects. All in, 1Q22 core earnings rose 9.3% YoY to MY28.8m.

• Construction orderbook still has room to grow. YTD job wins are just MYR27m short of KPG’s earlier FY22 job replenishment target guidance of MYR1.2bn. The group is now guiding for new FY22 job wins of MYR1.5bn or more – not too far from our job replenishment target of MYR1.6bn. We deem this is possible, as KPG is not reliant on public infrastructure jobs but rather focuses on infrastructure works for related parties, eg Eastern & Oriental (EAST MK, NEUTRAL, TP: MYR0.50). In addition, property launches are expected to gradually pick up in the coming quarters. As at end 1Q22, KPG’s construction orderbook stands at MYR4.4bn, translating into an orderbook/revenue cover ratio of c.3.7x.

• Earnings and valuation. We tone down FY22F-24F earnings post results by -28%, -24%, and -18% as we impute more conservative margins assumptions to reflect high building material costs – previously awarded jobs were exposed to material price fluctuations. Delay risks also cannot be ruled out, as KPG is facing manpower shortages to the tune of 20-30% vis-à-vis normal levels. We also roll forward our valuation base to FY23F. Consequently, we arrive at our new MYR1.45 TP after applying a 0% ESG premium/discount to our SOP-derived intrinsic value based on our in-house proprietary ESG scoring. Our unchanged 11x target P/E (15% discount to the KLCON Index’s forward P/E) is ascribed to the construction segment in our SOP valuation to reflect pressures from high input costs and the labour shortage surrounding the sector. Re-rating catalysts: Further opportunities in infrastructure contracts under Seri Tanjung Pinang Phase 2 or STP2, which amounts to c. MYR2bn in the next 5-7 years.

• Key downside risks: Slowdown in the property market, higher raw material cost pressures, and lower-than-expected new contract wins.

Source: RHB Research - 27 May 2022