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Zero exposure to government jobs expected to be a positive for Kerjaya

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Kerjaya Prospek Group Bhd (Dec 6, RM1.23)

Maintain outperform with an unchanged target price (TP) of RM1.40: Kerjaya Prospek Group Bhd has won a new contract award worth RM211.6 million, bringing its year-to-date (YTD) replenishment to around RM1 billion.

We are neutral on this as the contract value is within our replenishment target of RM1.2 billion for financial year 2018 (FY18). No changes to FY18 estimate (FY18E) and FY19E earnings. Maintain “outperform” with an unchanged TP of RM1.40.

Kerjaya announced on Wednesday that it had secured a building contract worth RM211.6 milllion from PPB Hartabina Sdn Bhd, a subsidiary of PPB Group Bhd. Construction works for the 31-storey service apartment, a nine-storey car-park podium with common facilities, and a block of four-storey office/commercial units with a two-level basement car park and commercial units are expected to commence on Dec 8, 2018, and be completed by June 8, 2021, or in 30 months.

We are neutral on the win as the replenishment is still within our FY18E replenishment target of RM1.2 billion. The latest win brings its YTD jobs secured to around RM1 billion, which makes up 83% of our replenishment target of RM1.2 billion. Assuming a conservative pre-tax margin of 15%, we expect the project to contribute RM31.7 million in pre-tax over the next 30 months. The replenishment will bring its outstanding order book to around RM3.1 billion with two to 2.5 years’ visibility.

The overall sentiment for the construction sector remains weak due to the cost review on mega infrastructure projects. However, we believe that Kerjaya is the least affected contractor in town due to its zero exposure to government-related jobs as all of its construction jobs are from the private sector.

In the near term, we are still anticipating another replenishment worth around RM400 million from Datuk Tee’s (Kerjaya’s major shareholder) private property arm as it is looking to launch a mixed development in Old Klang Road with gross development value (GDV) of RM1 billion. As for the longer term, we believe that

Kerjaya stands a good chance of winning more contracts in Penang mainly from E&O’s Seri Tanjung Pinang 2 (STP2) project as we believe more bridges are required to connect Penang Island and STP2.

No changes to our FY18E and FY19E earnings of RM145.5 million and RM154.5 million.

We maintain our “outperform” call with an unchanged sum-of-parts-derived TP of RM RM1.40 pegged at unchanged valuation of 11 times price-earnings ratio (PER) on FY19E construction earnings. The valuation ascribed to Kerjaya is at the highest end of our small-mid caps’ PER range of six to 11 times due to its excellent delivery track record of no delays in project delivery, better margins compared with the other players and zero exposure to government jobs. 

Risks to our call include: i) lower-than-expected job wins; ii) delay in construction progress; and iii) lower construction margins. — Kenanga Research, Dec 6

This article first appeared in The Edge Financial Daily, on Dec 7, 2018.

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