KERJAYA and its JV partner are set to undertake a mixed property redevelopment project in Butterworth, Penang. This is a 7-year project of which its Phase 1 (GDV: up to RM2.0b) is expected to start next year. While this venture is expected to be accretive to construction profits and property earnings, large capital outlay for this project may shift KERJAYA from a net cash position to net debt, assuming consolidation for its 55% stake in the JV. We have incorporated some benefit to the fair valuation for the property venture, but will await more details, likely to be revealed during results briefing this month. Our new TP is reduced slightly to RM2.21 from RM2.24, on lower PER applied. OUTPERFORM reaffirmed.

Redevelopment project in mainland Penang. Yesterday, KERJAYA and Aspen Vision Development Sdn Bhd formed up a 55:45 JV Co to redevelop a 36.025-acre freehold land in Kampung Manis, Butterworth, Penang into a mixed residential-cum-commercial property development (to be named "Rivanis"). The JV Co will pay the land owner, Railway Assets Corporation (RAC, a federal statutory body for railway assets) a total consideration of RM156.5m (RM54.1m cash and 338 units of affordable housing worth RM102.4m).

A 7-year mixed property development project. This project spans three phases over seven years. Phase 1 with GDV of RM1.5b-RM2.0b over three years, includes:

• Phase 1A: 338 units of affordable housing (to be transferred to RAC as part of the land purchase consideration), • Phase 1B: 1,680 residential units • Phase 1C: commercial retail units.

Phase 2 will comprise 1,680 serviced apartments units while Phase 3 will consist of additional commercial retail development. Pending finalising, Phase 1 is expected to start next year.

However, KERJAYA will shift to a net debt position. At RM99.6 psf, we believe the land price is attractive, given transaction prices ranging from RM100 to RM250 psf in the nearby areas over the past five years.

While this venture is expected to contribute positively to its future earnings through construction profits and property earnings, the significant capital outlay required for this project will shift KERJAYA from net cash position (RM231.4m as of June 2024) to net debt, assuming consolidation. Assuming RM2.0b GDV, with 70% debt funding, KERJAYA would need to consolidate RM1.4b debt onto its balance sheet, resulting in net debt of RM1.17b or 1.0x net gearing. On a positive note, the cash payments for the land purchase are structured over five instalments, i.e. RM1.08m as an advance payment, RM4.3m in 12 months, RM13.1m in 24 months, RM10.1m in 36 months and RM25.5m in 84 months. This should help to alleviate near-term cash flow pressure.

Forecasts. While maintaining FY24F forecasts and job win assumption of RM1.6b, we upgrade FY25F earnings forecasts by 7% to account for higher construction earnings with an increased job win assumption to RM1.8b from RM1.6b on this new property development project.

However, NDPS maintained at 10 sen for FY24-FY25.

Valuations. In view of the anticipated weakening of balance sheet, we no longer value its construction earnings at premium 16x for mid-cap builder and have reduced it to 14x. With the inclusion of the RNAV from this new property project, we have trimmed our SoP-driven TP slightly to RM2.21 from RM2.24. 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 - 12 Nov 2024