• Keep BUY, new MYR1.55 TP from MYR1.48, 40% upside with c.4% yield. Kerjaya Prospek’s 1Q23 core profit of MYR29.3m (+2.4% YoY) was below estimates – at 20% of our and Street’s full-year projection. The slight negative deviation was partly due to higher-than-expected administrative costs. Moving ahead, its venture into the industrial building segment via its partnership with Samsung C&T serves as a strategic buffer in the event that jobs from the property market face a slowdown.

• Results review. The construction segment recorded PAT of MYR29.3m (+3.8% YoY) in 1Q23, backed by higher progress billings from increased construction activities. As such, the segment’s 1Q23 PAT margin remained strong at 9.9% (1Q22: 9.5%). The property development segment saw a MYR0.2m loss after tax (1Q22 PAT: MYR0.4m) in 1Q23, mainly from marketing expenses related to the soft launch of The Vue @ Monterez project (GDV: MYR250m) in Jun 2022.

• Outlook. We estimate that KPG has at least 2.5k workers. With such ample manpower capacity, KPG should be able to recognise higher progress billings from its MYR4.5bn orderbook (4x cover ratio) in the coming quarters. While KPG is partnering with Samsung C&T to bid for sophisticated industrial jobs in the technology industry (such as data centres), KPG itself is also eyeing industrial property jobs such as warehouses. So far, KPG has secured MYR464m (after taking into account its effective share in each contract) of new jobs in FY23 (35.7% of our FY23 MYR1.3bn job win target).

• We cut FY23-25F earnings by 6%, 5%, and 2% as we factor in: i) A more conservative billing progress for its construction jobs, and ii) higher administrative assumptions. Nevertheless, FY23F earnings growth remains above 15%. Post earnings adjustment and rollover of our valuation base to FY24, we arrive at our new SOP-derived MYR1.55 TP, which incorporates a 0% ESG premium/discount to the intrinsic value.

• Key drivers. Aside from KPG’s industrial venture, the group is likely to see steady job flows from the development of Seri Tanjung Pinang phase 2 (c.MYR2bn of jobs in the next 5-7 years) and Bukit Bintang City Centre (c.MYR600m jobs awarded so far). Given such prospects, we believe valuations are undemanding, as the stock is trading -2SD below the Bursa Malaysia Construction Index’s 5-year mean P/E. Key downside risks: Property market slowdown and prolonged cost pressures.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. We now assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note Envisioning a Better Future. Our 3.0 ESG score for KPG is unchanged.

Source: RHB Research - 24 May 2023