Following our recent engagement with KERJAYA, we feel reassured and maintain our positive stance on its outlook with the following key takeaways:- (i) strong orderbook visibility, (ii) aiming new jobs in the thriving data centres sector, and (iii) do not anticipate further margin compression. We maintain Buy call with an unchanged TP of RM1.95 based on 15x CY25 EPS.

Strong Orderbook Visibility

As of end-Dec 2023, KERJAYA’s outstanding order book stood at RM4.2bn, with c.48% contributed by its related parties (namely KPPROP and E&O). Looking ahead, KERJAYA aims to replenish its order book annually with new contracts in the range of RM1.6bn to RM2.0bn in FY24 and FY25, respectively largely supported by potential new jobs from E&O’s Andaman Island development. Notably, the Andaman Island (gross GDV: RM60bn, estimated development period: 30 years) has already commenced with three property projects totaling RM1.2bn since late-2021. Moving forward, E&O is expected to launch another c.RM1.3bn in new projects in CY24, indicating a potential uptick in job replenishment for KERJAYA in the near term.

We believe that KERJAYA’s job replenishment target of RM1.6-2.0bn is achievable, supported by its proven track record and increased job flows from Andaman Island. Assuming a construction cost to GDV ratio of 55%, we estimate potential contracts worth RM715mn from Andaman Island alone this year. Note that, YTD job wins totaling RM377.8mn have already accounted for 17-21% of KERJAYA’s orderbook replenishment target range. Therefore, we are positive on the company's prospects, given the substantial earnings visibility provided by its outstanding order book, which is expected to sustain robust earnings for at least the next three years.

Aiming New Jobs in the Thriving Data Centres Sector

Recap, KERJAYA formed a joint venture (JV) with Samsung in June 2022, tapping into industrial construction and infrastructure space. Since then, this JV has secured a factory building construction job for a key client in Melaka amounting to RM1.5bn in Oct 2022, marking the group’s first entry into building industrial properties. According to our channel check, this RM1.5bn project is currently progressing as scheduled, albeit with adjustments to the timeline due to a new variation order. The piling works were completed in 2023, while the substructure and foundation works are expected to be completed by 2QCY24 before proceed to mechanical and electrical works.

Leveraging this partnership, KERJAYA aims to broaden its client base and further venture into the industrial construction field. Furthermore, KERJAYA is actively pursuing bids for data centre construction projects, having engaged with several renowned IT companies planning to establish new data centres in the Penang and Johor regions.

Do Not Anticipate Further Margin Compression

Despite KERJAYA’s FY23 core earnings increasing by 13% YoY, its core net margin declined to 9% (-1.3ppt YoY), marking the first time the profit margin fell into single digits in the past decade. We attribute the margin squeeze to the escalating raw material costs and one-off provisions for the delayed projects disrupted by the pandemic. Looking ahead, we do not anticipate further margin compression, as we expect stabilising input costs and contributions from higher complexity contracts to bolster margins.

Impact

We Keep Our Earnings Projections for FY24-FY26F Unchanged.

Valuation

We reiterate our Buy call on the stock with an unchanged target price of RM1.95, based on 15x CY25 EPS. We continue to like KERJAYA for its:- (i) solid earnings visibility, (ii) consistent and robust replenishment of its order book and (iii) the potential growth in industrial property construction leveraging the partnership with Samsung.

Source: TA Research - 15 Mar 2024