• MYR0.88 FV based on 8.5x FY24F P/E. Kumpulan Kitacon’s long-term relationship with renowned developers may continue supporting its orderbook replenishment and profit growth. The 8.5x P/E is within the 8-10x P/E range ascribed to most small cap peers under our coverage and is at a c.30% discount to Bursa Malaysia Construction Index’s 5-year mean P/E of 12.4x. In light of the stable and consistent job replenishment trends, we view its valuation as undemanding – trading at 6.3x FY24F P/E (>2SD below the Bursa Malaysia Construction Index’s 5-year mean).

• Robust outstanding orderbook. KITACON has secured new jobs worth MYR906.8m (already a record high) in FY23 as of 22 Aug. This brings its outstanding orderbook to MYR1.4bn (cover ratio of 2.9x based on FY22 revenue). We expect the group to secure another MYR100m worth of jobs by end FY23F, with FY24F and FY25F estimated to clinch MYR800m and MYR900m worth of new orders. We believe this is reasonable as the group’s current ongoing tenders as of 22 Aug are at MYR1.2bn (for 34 projects). Its tender entries are done throughout the year – enabling a steady flow of job wins with 13 new jobs secured thus far for FY23.

• Strategic focus in Selangor. More than 70% of KITACON’s revenue is derived from projects in Selangor. This enables the group to capitalise on Selangor’s GDP growth, whereby the Selangor Government projected a GDP growth rate of 6.5-7% annually from 2021-2025 under the First Selangor Plan. This projected growth rate is much higher than the target GDP growth pa of 5-6% from 2021-2025 under the Mid-Term Review of the 12th Malaysia Plan. Industrial properties may serve as a growth factor for its orderbook, with Selangor recording MYR5.4bn transactions of industrial properties in 1H23 (FY22: MYR10.1bn).

• Earnings projection. We are projecting a 3-year earnings CAGR of 14% for KITACON, underpinned by estimated sturdy job win targets of MYR800m and MYR900m for FY24F and FY25F vs MYR400-600m in FY21-22. The record high job replenishment in FY23F would also ensure higher progress billings as they move along the S-curve. Meanwhile, the scenario of having too many jobs is not a concern as the average tenure of jobs is relatively short at 18-24 months, with some even shorter than a year. A rerating catalyst for the stock includes potentially securing more jobs in Johor, as the state contributed 1.6% of revenue in FY21.

• Net operating cash flow generation is expected to be healthy at MYR36-56m pa in FY23-25F, thanks to its stable earnings growth. In addition, KITACON’s net cash is forecasted to be at MYR113-168m pa in the same period. This should support the commitments in terms of capex and also dividends. Assuming a 25% dividend payout ratio (similar to the group’s policy), we derive prospective yields of 3.2% to 4.4% for FY23-25F.

• Key risks include lower-than-expected job replenishments, unexpected delays, and loss of key management personnel.

Source: RHB Securities Research - 22 Sept 2023