This article first appeared in The Edge Financial Daily on April 25, 2019
Kerjaya Prospek Group Bhd
(April 24, RM1.38)
Downgrade to underperform with an unchanged target price (TP) of RM1.20: Kerjaya Prospek Group announced that they have secured a contract worth RM438.8 million for the construction of main building works for a proposed mixed development project at Jalan Puchong. This represents Kerjaya’s third win for 2019. The scopes of work comprise: i) one block of 25-storey offices and hotel and two blocks of 53-storey services apartments on top of an 11-storey podium; and ii) a four-level basement car park. The construction work is expected to commence on May 2 and completed within 42 months.
We are neutral on the win as the contract falls within our financial year 2019 (FY19E) order book replenishment of RM1.2 billion and we had anticipated this replenishment from Kerjaya Prospek’s major shareholder (and executive chairman) Datuk Tee Eng Ho’s private property arm in FY19, as highlighted previously.
To recap, in the first quarter of 2019 (1Q19), Kerjaya had earlier secured RM435 million worth of contracts. This new job win brings Kerjaya’s year-to-date (YTD) replenishment to RM874 million, making up 73% of our FY19E replenishment target of RM1.2 billion. Assuming a pre-tax margin of 15%, the project is expected to contribute an aggregate of around RM49.4 million to the bottom line. The replenishment will bring its outstanding order book to around RM3.7 billion providing two-and-a-half to three years’ visibility.
In the past few months, the construction space has seen some positive catalysts, particularly in terms of infrastructure projects, with the recent talk of the town, such as the revival of East Coast Rail Link (ECRL). However, we are less excited with the abovementioned project as highlighted in our recent construction sector report dated April 16, 2019. Nonetheless, Kerjaya Prospek, being a high-rise player is not an immediate beneficiary given its portfolio of projects that has zero government jobs and hence, is unlikely to see contracts from those projects. On the other hand, in the longer term, we opine that Kerjaya Prospek could stand a chance of winning more contracts in Penang, mainly from Eastern & Oriental’s Seri Tanjung Pinang 2 project.
We make no changes to our FY19-20E earnings of RM154.3 million to RM157.3 million.
Downgrade to “underperform” [from market perform] with an unchanged sum-of-parts-derived TP of RM1.20 pegged to 10 times price-earnings ratio (PER) FY20E construction earnings, and five times property earnings (previously, it was pegged to FY19E construction and property earnings) as we roll forward valuation base to FY20E.
There are no changes to our TP of RM1.20 as its earnings growth prospect is unexciting. Our TP implies the FY20E PER of 9.5 times. The valuation ascribed to Kerjaya Prospek is at the higher end of our small-mid caps’ PER range of six to 11 times due to their excellent track record in project delivery without delay and better margins compared to the other players.
We believe our downgrade is timely given its YTD gains of 16.5%. — Kenanga Research, April 24