This article first appeared in Corporate, The Edge Malaysia Weekly, on May 9 - 15, 2016.

EXCITEMENT over Kerjaya Prospek Group Bhd’s (formerly Fututech Bhd) new businesses has been obvious, pushing up its share price to an all-time high last week. This is reflected in executive chairman and major shareholder Datuk Tee Eng Ho’s optimistic forecast for the construction outfit, which has targeted double-digit earnings growth this year.

“Leveraging our listing status, we have been able to diversify our client base and venture into the infrastructure space. We secured one infrastructure project in March this year and will be on the lookout for more in Malaysia,” he says, referring to the RM181 million STP 2 dredging project in Penang awarded by China Communications Construction Co — Kerjaya Prospek’s maiden infrastructure job.

To recap, in February last year, lighting and kitchen cabinet manufacturer Fututech announced its plan to acquire two family-owned construction companies from Tee and his family for RM380 million. Kerjaya Prospek Sdn Bhd — one of the two companies — had a substantial order book, 20 years of proven track record as a contractor for luxury high-rise properties and an exclusive long-term clientele that included Eastern & Oriental Bhd, S P Setia Bhd and Eco World Development Bhd.

Currently, 80% of the company’s revenue comes from these top three clients.

Last August, however, the price tag was revised to RM458 million after taking into consideration the latest financial performance of the target companies. Nonetheless, it was still a good deal for the minority shareholders as the target companies were valued at a 2% to 12% discount to the auditor’s DCF-derived value of RM467 million to RM520 million. This also implied a PER of 8.4 times, below the average PER of 11 times for its peers.

Interestingly, the acquisitions come with a cumulative profit guarantee of RM150 million for FY2016 to FY2018, which works out to an average annual profit of RM50 million. Assuming a small-cap PER of 10 times, Kerjaya Prospek is worth RM500 million, which is close to its current market capitalisation of RM507.7 million.

In other words, current market valuation implies an expected FY2016 profit of just RM50 million, assuming 10 times PER. But is the market valuing the relatively unknown construction outfit too conservatively?

Tee says he believes the company’s current share price does not reflect its full earnings potential, strong track record and competitive strengths.

Bouncing back from a 52-week low of RM1.17 recorded last August, Kerjaya Prospek breached its then target price of RM1.78 in mid-January. Year to date, the small cap has risen 17.2% and hit an all-time high of RM1.91 last Thursday, beating a 3.2% gain by the KL Construction Index (see chart).

It is not hard to see why investors are excited. The completion of the asset injection on Jan 21 saw the company’s order book expand by over 20 times to RM2.1 billion.

Pointing out that Kerjaya Prospek had already achieved a consolidated pro forma core net profit of RM79 million last year, Tee says the company’s outstanding order book of RM2.1 billion as at end-March will keep it busy over the next three years.

This translates into an order book-to-revenue ratio of 3.5 times, one of the highest in the construction industry (see table). Having bagged the dredging project in Penang and a RM102 million residential project in Genting Highlands from within the group, Kerjaya Prospek is confident of hitting its RM600 million order book replenishment target this year.

Market talk is that the construction outfit is likely to win a major high-rise project in Johor worth over RM300 million. However, Tee declines to comment on this. If this turns out to be true, the company would be just RM20 million shy of its RM600 million target.

Set up in 1984, Penang-based Kerjaya Prospek has established a niche in building premium high-rise buildings with most of its equipment fully depreciated. Since then, it has expanded to the Klang Valley and Johor.

It also has a property business with projects in Genting Highlands and Shah Alam with a total gross development value of RM500 million.

“Last year, the property business made its first contribution to the group. The Genting project started last month and should contribute to the group’s earnings over the next four years. We target to launch our Shah Alam project next year,” Tee says.

When asked if the slowing property market is a concern, he comments that the sector is still doing relatively well, supported by continuous job flow. If the macro environment worsens, he says Kerjaya Prospek has a solid balance sheet and can emerge stronger after the downturn, as it did in the 1998 Asian financial crisis.

That said, earnings dilution could be a worry. As part of the asset injection, the company placed out 40 million shares in 1Q2016, of which 90% went to local institutional funds, to fulfil the 25% public spread requirement. The placement of the first tranche was completed in 1Q2016, reducing Tee and family’s stake in the company to 73.8%.

Its shares outstanding could double to 540.2 million if it places out the second tranche — another 60 million shares — and major shareholders’ redeemable convertible preference shares are converted.

However, the potential massive dilution of existing shareholders’ stakes will be mitigated by the strong incremental earnings from the acquisitions, according to UOB Kay Hian. Calling it an upcoming mid-cap construction player, the research house considers Kerjaya Prospek its top small-cap pick in the industry.

UOB Kay Hian opines that Kerjaya Prospek deserves better valuation due to its high earnings visibility, superior margins, best-in-class operational efficiency, net cash balance sheet and strong track record that generates repeat orders. On a diluted basis (before the conversion of warrants), its shares are trading at 13.1 times its pro forma FY2015 net profit, below the construction sector’s trailing PER of 16 times.

The research house has a target price of RM2.20 on the counter.

As Kerjaya Prospek’s market capitalisation has tripled since the asset injection, Tee hopes the company can join Bursa Malaysia’s billion-ringgit club in a year.

The company resumed its dividend payment in 2013 and has since paid three sen consistently. Will the company raise the dividend, given that it is now a much bigger construction player? Tee says that is one of the company’s targets. 

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