KERJAYA's 9MFY24 results matched expectation with core profit rising 21% YoY to RM116.7m on higher construction billings and property sales. The 3QFY24 NDPS of 7.0 sen, including a 4.0 sen special dividend, came as a pleasant surprise. We like KERJAYA for its solid earnings track record and consistent quarterly dividend pay-outs though the continued price uptrend (+41% YTD) has largely priced in the positive. Thus, we downgrade the stock to MP with an unchanged TP of RM2.21.

9MFY24 result within expectation. At 66%/70% of house/street's full- year forecasts, KERJAYA's 9MFY24 core profit of RM116.7m came within expectations as we expect seasonally strong earnings in 4QFY24. It declared a total of NDPS of 7.0 sen in 3QFY24, (3.0 sen regular and 4.0 sen special; ex-date: 13 Dec; payment date: 20 Dec), raising 9MFY24 NDPS to 12.0 sen (9MFY23: 6.0 sen), above our FY24 NDPS projection of 10 sen.

Strong construction works boosted earnings. 3QFY24 core profit jumped 24% QoQ to RM46.1m on the back of 28% hike in revenue to RM504.8. This was thanks to improved progress of construction works activities. However, PAT margin for its construction segment fell to 8.9% from 11.8% due to a JV job in partnership with Samsung which comes at lower margin due to its role as project manager.

Property segment also attributed to YoY earnings growth. YTD, 9MFY24 core profit rose 21% to RM116.7m as revenue leapt 28%, on higher billings from construction (+25%) while property revenue jumped to RM44.1m from RM17.7m in 9MFY24 due to its new projects, namely The Vue @ Monterez and Papyrus @ North Kiara.

The key takeaways from its results briefing are as follows:

1. YTD, it has won 10 new jobs worth a total of RM1.58b, surpassing its FY24 job win target of RM1.5b (our assumption is RM1.6b). 81% of these contract values are related-party transactions (RPT) including six jobs from E&O (Not Rated) and three jobs from KPPROP (Not Rated). Currently, its outstanding order book stands at RM4.4b (48% are RPT) with 28 on-going projects.
2. Job replenishment target for FY25 is RM1.5b (vs. our assumption of RM1.8b). Its current tender book of RM4b comprises RM2b building jobs (70% are RPT) and RM2b industrial jobs including data centre and logistic warehouse jobs.
3. The take-up rate for its The Vue @ Monterez (GDV of RM300m) remains slow at 74% as of 30 Sept from 70% three months ago. The newly launched RM500m GDV of Papyrus @ North Kiara has achieved 44% take-up rate from 30% as of 30 June.
4. For its 55:45 Rivanis Ventures with Aspen on a redevelopment project in Butterworth, the definitive agreement is targeted to be signed by 1QCY25. If materialises, earnings contribution will kick- start in FY26 and the targeted pricing is RM500 per sq ft for initial phase. KERJAYA believes it has financial strength to execute this project (Phase 1 GDV of RM1.5b-RM2.0b over three years).

Forecasts. Maintained FY24-25 earnings forecast but raised FY24 NDPS to 15.0 sen (from 10.0 sen). Maintain FY25 NDPS at 10.0 sen.

Valuations. We maintain our SoP-driven TP of RM2.21 (see Page 3) valuing its construction business at 12x forward PER, at a discount to the 22x we ascribed to large contractors (i.e. GAMUDA, IJM, and SUNCON) given KERJAYA's focus on the high- rise building sector, currently weighed down by oversupply in the office and residential segments. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

Investment case. We continue to like KERJAYA for: (i) its innovative and hence high-margin formwork construction method (c.10% net margin), (ii) its lean and hands-on management team with a strong execution track record, (iii) its strong earnings visibility underpinned by a sizeable outstanding order book and recurring orders from related companies (such as E&O, KPPROP) of at least RM1b a year. We downgrade the stock to MARKET PEROFRM from OUTPERFORM following recent price performance which priced in its positives. However, it offers attractive dividend yields of 5%, based on regular dividend.

Risks to our call include: (i) further deterioration in the prospects for building jobs, (ii) rising input costs, and (iii) liquidated ascertained damages (LAD) from cost overrun and delays.

Source: Kenanga Research - 28 Nov 2024