RHB: Kerjaya Prospek recovering lost ground, maintains buy on valuation

TheEdge Wed, Jul 01, 2020 11:06am - 3 years View Original


KUALA LUMPUR (July 1): RHB Research has maintained its "buy" rating on Kerjaya Prospek Group Bhd at RM1.07, with a higher target price of RM1.31 from RM1.25.

In a note today, RHB analysts Muhammad Danial Abd Razak and Eddy Do Wey Qing said they remain optimistic about Kerjaya Prospek's earnings recovery prospects due to its advantage in work execution, robust order book and aggressive ongoing tenders.

The analysts said its first quarter ended March 31, 2020 (1QFY20) revenue stood at RM212 million, a 21% decrease quarter-on-quarter (q-o-q) and a 20% decline year-on-year (y-o-y).

Core net profit came in at RM22 million, a 38% decline q-o-q and 20% reduction y-o-y, only accounting for 17% and 15% of RHB and consensus forecasts, respectively, which were below expectations.

"The decline in revenue was mainly due to the impact of the two weeks of the Movement Control Order during the quarter. Works were unable to progress during this period, which affected billings. We expect a more pronounced impact in 2QFY20," they added.

In 1QFY20, construction revenue was 14% lower y-o-y and 19% lower q-o-q. Profit after tax experienced a bigger drop of 24% y-o-y and a 31% q-o-q decline due to expanded costs against revenue. Margins contracted by 1.3 percentage points y-o-y from the same period last year to 10%.

"Still, we view this positively, as margins should remain in double-digit territory versus peers with single-digit margins — even in a normal operating landscape. Given the advantage in efficiency, the company should be able to remain profitable in 2QFY20 despite longer work stoppages seen during this period.

"This was made possible by the reduction in building material places in the market. We understand Kerjaya Prospek was able to enjoy favourable rates due to a slowdown in demand and its ability to pay cash for supplies. The company is expecting 5% and 3% declines in steel bar and ready-mixed concrete prices."

RHB fine-tuned FY20F-22F earnings following 1QFY20's results by 22% and 12% declines and a 3% gain, mainly on their expectations of slower construction billings during this year.

The research house has also scaled back estimates for its construction progress by 5-10% and pegged the new TP to a 14 times price-earnings ratio to construction earnings on account of a positive outlook next year.

"We give a higher discount of 55% from 30% to the property division to reflect further downside risks on margins due to aggressive marketing efforts to sell units, which are slated for launch next year," it added.

RHB highlighted key risks for the construction and engineering company are margin erosion from increasing competition, higher raw material prices, lower-than-expected new contract wins, and a severe slowdown in the property market — its largest client base.

As at 10.23am, Kerjaya Prospek shed two sen or 1.87% to RM1.05, with a market capitalisation of RM1.31 billion. The stock saw some 21,800 shares traded.

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