This article first appeared in The Edge Malaysia Weekly on June 12, 2017 - June 18, 2017
KERJAYA Prospek Group Bhd, known for its industrialised building system (IBS), is one of the few construction companies listed on Bursa Malaysia to be a in a net cash position despite the growing number of projects it is taking on.
Executive chairman Datuk Tee Eng Ho tells The Edge that the key to its strong balance sheet is that its clients are good paymasters.
“We’ve got good clients that make payment on time. This is very important as it avoids any delay which could lead to an increase in costs,” he says.
He adds that prudent cost management and reasonable profit margins are the other factors contributing to its strong cash position.
“If you look at the overhead costs, it’s only about 3% of our revenue as compared to our peers’ 5% to 8%. These are the main reasons for the healthy balance sheet that we achieved,” he says.
Of the 25 companies listed under the construction sector on Bursa Malaysia, only seven are in a net cash position. Sunway Construction Group Bhd and Puncak Niaga Holdings Bhd have a higher net cash level than Kerjaya Prospek’s RM147 million.
Sunway Construction is trading at a price earnings (PE) ratio of 21.7 times to Kerjaya Prospek’s 14.2 times, while Puncak Niaga’s has been in a net loss position over the last 12 months.
The group recorded a strong performance in the previous financial year ended Dec 31, 2016 (FY2016), driven by its construction arm. It is set to remain busy until at least 2020, on the back of an outstanding order book of RM2.6 billion.
The group’s replenishment of its order book in FY2016 was RM1.5 billion, surpassing its internal target of RM600 million. This has led to a stronger performance in the first quarter of this year as revenue and net profit grew 25.4% and 21.9% to RM233.2 million and RM28.9 million, respectively.
Year to date, the group has managed to secure RM316 million worth of jobs, which is about 40% of its RM800 million order book target for FY2017.
Lum Joe Shen, an analyst with Kenanga Research, says in a May 26 report that Kerjaya Prospek’s tender book stood at RM1.8 billion, and is believed to comprise jobs from core clients such as S P Setia Bhd, Eastern & Oriental Bhd (E&O) and Eco World Development Group Bhd.
Bloomberg data shows that Tee has a 10.7% stake in E&O through Paramount Spring Sdn Bhd and Kerjaya Prospek Development (M) Sdn Bhd. Tee was recently appointed a non-independent and non-executive director at E&O.
While it is uncertain how many of the tenders book it will win, Kerjaya Prospek had a success rate of 20% in FY2016. Assuming it maintains this rate, there should be an addition of jobs worth RM360 million to its order book.
Tee’s privately held property arm will be launching a mixed-used development project in Old Klang Road with a gross development value of about RM1.2 billion. The construction cost is expected to be about half-a-billion ringgit and the job will be undertaken by Kerjaya Prospek.
On this basis, its project replenishment for the year could easily surpass the RM1 billion mark.
New rerating catalysts
There are a few rerating catalysts for the group, including a potential bonus issue and dividend policy, that could be in place by this year as well as an expected increase in earnings from FY2018 onwards.
Lum notes in his report that Kerjaya Prospek may undertake a one-for-one bonus issuance, given its high share premium of RM332 million compared with its share capital of RM257 million. It is worth noting that share premium accounts will be dispensed with under the Companies Act 2016, and will be merged with the share capital account if not utilised within a 24-month grace period starting this year.
A fund manager with a local asset management, who has been following Kerjaya Prospek, says the bonus issue is likely to be undertaken next year and that a dividend policy is likely to be in place in the near future.
He adds that Kerjaya Prospek could see a higher earnings growth from FY2018 onwards as well when most of the construction projects are completed.
“Usually, when a project is completed, higher profits will be booked. As some of the ongoing projects are likely to be completed by FY2018, we should see a higher earnings growth at that time. Along with the strong replenishment of jobs, the group should continue to remain on a strong footing,” he says.
He points out that despite the risk of slowing sales and concerns of property overhang, the group has continued to do well, indicating that it is winning market share.
The better performance seen in the last few years has also resulted in a surge of its share price. Kerjaya Prospek’s counter rose by more than three times since it was last traded below RM1 at the end of 2014. YTD, the group has maintained an uptrend with an increase of 48.9% to RM3.23, giving it a market capitalisation of RM1.7 billion.
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