• Keep BUY and MYR1.44 TP, 18% upside with 4% FY23F yield. Yesterday, Kerjaya Prospek secured a MYR398m job from Tanjung Pinang Development (TPD), an indirect subsidiary of Eastern & Oriental (EAST MK, BUY, TP: MYR0.50), for works related to coastal protection structures for the Seri Tanjung Pinang Phases 2B and 2C (STP2) development at Tanjung Tokong, Penang. The 36-month project is expected to commence on 10 Apr. At present, KPG is trading at an undemanding level, at -1SD below the KLCON index’s 5-year P/E mean.

• Orderbook impact. This latest contract – the second job clinched in FY23 by the group – brings its outstanding construction orderbook to MYR4.7bn, which translates to an orderbook-to-revenue cover ratio of 4.8x. Meanwhile, KPG’s YTD new job wins for FY23 stand at MYR533.4m. If we were to take into account its 49% effective share from the recently won the BBCC Development contract worth MYR66m (instead of the total contract value of MYR135m), KPG’s YTD new job wins in FY23 amounts to MYR464m (ie 35.7% of our MYR1.3bn job replenishment assumption for FY23). The PAT margin for the project is estimated to range 8-12%, in line with KPG’s regular construction projects.

• Job flows related to STP2. Between FY16 and FY22, KPG was awarded c.MYR1bn worth of contracts (Figure 1) related to various phases of STP2. There were over five awards won from various parties in addition to jobs from TPD – the former include Persada Mentari and China Communications Construction Company (M). KPG previously secured a coastal protection structure-related job by TPD for the STP2 development in Sep 2020, worth MYR154.4m. As such, we believe there should be minimal execution risk for KPG, given its past experience in such jobs.

• Prospects. The job pipeline related to STP2 is robust – with c.MYR2bn worth of projects to be executed in the next 5-7 years. Moreover, the 760- acre Andaman project being developed in STP2 has an estimated GDV of MYR55bn, whereby KPG could stand a chance to bid for upcoming property projects. Back in Apr 2022, it was awarded a MYR265m contract by Persada Mentari to build two blocks of apartments with a total of 1,020 units, named The Meg in STP Phase 2A – indicating that the company is also no stranger to building high-rise properties in the development area.

• No changes to our earnings estimates as the latest job win related to STP2 is within our FY23 replenishment assumption of MYR1.3bn. Therefore, our SOP-derived TP remains at MYR1.44 after applying a 0% ESG premium/discount to our SOP-derived intrinsic value, based on our in- house ESG proprietary methodology. We favour KPG due its upbeat prospects, backed by a sizeable MYR1.5-2bn tenderbook coupled with a net cash pile of >MYR200m as at end-3Q22. KPG’s partnership with Samsung C&T may also help bolster and diversify its construction orderbook as the collaboration focuses on industrial jobs.

• Key risks: Potential labour shortages and a slow job replenishment rate.

Source: RHB Research - 8 Feb 2023