• Keep BUY, with new MYR1.75 TP from MYR1.71, 11% upside and c.6% FY24F yield. Kerjaya Prospek has secured a job from Persada Mentari, Eastern & Oriental’s (EAST MK, BUY, TP: MYR0.88) indirect subsidiary, to undertake a proposed Andaman Island development project (also known as Seri Tanjung Pinang Phase 2 (STP2)) in Penang worth MYR170.9m. The job scope covers the construction of main building works for, amongst others, a 45-storey structure comprising a 38-storey serviced apartment block of 380 units – to be completed within 35 months from 18 Jan 2024.

• Further details. This is KPG’s fifth job win from Persada Mentari and the former’s 13th job related to the Andaman Island under the STP2 development in Penang. On further scrutiny, we learnt that this job relates to the Arica project (GDV: MYR400m) which is E&O’s second serviced residence project at Andaman Island after The Meg. This brings KPG’s latest outstanding orderbook to MYR4.5bn – translating to earnings visibility of up to four years. Meanwhile, the MYR170.9m job makes up 11% of our FY24 job replenishment target of MYR1.5bn for KPG. In totality, the group has so far secured MYR1.7bn (effective share) and MYR1.4bn worth of contracts under STP2 and other developments related to the Batu Kawan area – highlighting its prominence in Penang.

• Prospects. STP2 is divided into Andaman Phase 1 (253 acres) and Phase 2 (507 acres). KPG was involved in the reclamation structure works of Andaman Phase 1 for a cumulative job value of c.MYR230m. With Andaman Phase 2 yet to begin any significant reclamation works, we believe it stands a fair chance to do the reclamation works for this phase of STP2 along with some small connecting bridges within the said development. In the long run, STP2 could provide continuity of job flows for KPG over the next 5-7 years, worth c.MYR2bn. Separately, we view KPG’s partnership with Samsung C&T as enabling it to leverage on industrial building jobs amid the country’s foreign direct investment growth.

• No changes to our earnings estimates as the latest job win is within our FY24 job replenishment assumption. However, we are taking the opportunity to adjust our ESG score to 3.1 from 3.0 to reflect KPG’s involvement in Andaman Island Phase 1 which attained the GreenRE Platinum Provisional Certification under the township category. Such certifications would entail KPG to continue ensuring sustainable construction site management and practices, especially under STP2. As a result, we arrive at a new SOP-derived TP of MYR1.75. Taking into consideration the aforementioned prospects, we view its valuation to be undemanding as the stock is trading at -0.5SD from the Bursa Malaysia Construction Index’s 5-year mean P/E.

• Rerating catalysts: Securing jobs beyond STP2 in Penang, especially in Batu Kawan, and larger-than-expected wins from the industrial space.

• Key downside risks include a property market slowdown and prolonged cost material pressures.

Source: RHB Securities Research - 4 Jan 2024