This article first appeared in The Edge Financial Daily on July 24, 2019

Kerjaya Prospek Group Bhd
(July 23, RM1.46)
Maintain buy with a higher target price of RM1.72: After recovering from a 99 sen trough (December 2018), Kerjaya Prospek Group Bhd’s share price has been flat over the past 12 months. This is unjustified, as positive operating metrics are not priced in — over the past year, earnings grew 16% year-on-year (y-o-y), outstanding construction order book increased 20% y-o-y to RM3.5 billion; and year-to-date (YTD) new orders more than doubled to RM1.1 billion. It deserves to trade at 14 times price-earnings (+1 standard deviation from a three-year average forward earnings).

First quarter of financial year 2019 (1QFY19) earnings grew 9% y-o-y, representing its 14th consecutive quarter of y-o-y expansion — a feat it has maintained since completing its reverse takeover in 2016. 1QFY19 net profit grew despite a 55% y-o-y fall in property earnings, after the completion of its sole property project Vista Residence. Contributions from the property division narrowed to 6% of net profit versus 14% in 1QFY18. We expect this trend to continue, with FY19 earnings growth underpinned by the construction segment. Meanwhile, construction margins have not faltered, and are staying in the 11% to 12% range.

YTD, Kerjaya Prospek has secured new construction orders worth RM1.1 billion, where 60% of jobs were secured from external property developers (the remaining 40% was awarded from a related company, but the transaction was conducted on commercial terms). This figure already exceeds its FY18 new order tally of RM990 million by 11% and with more than five months to go, the company appears likely to exceed its RM1.2 billion FY19 new order target.

The company has taken a selective approach to bidding for new orders, even declining a RM200 million to RM300 million contract to avoid the risk of subsequent non-payment. This is in light of news surfacing that smaller contractors could be facing delays in collection. Meanwhile, its net cash of RM191 million (15 sen per share) could be used to make opportunistic investments in or acquisitions of complementary businesses.

We lift its FY19 to FY21 forecasts by 1%-6%, as we increase our FY19 new order assumption to RM1.3 billion from RM1 billion. We anticipate at least another contract win within the RM200 million to RM250 milliom range (its average contract size). We believe Kerjaya Prospek is maintaining outstanding tenders of RM1.6 billion with an outstanding order book of RM3.5 million. — RHB Research Institute, July 23