KIMLUN’s 1QFY23 results missed expectations due to slower-than expected work progress on sites. On a brighter note, YTD job wins are on track to meet our full-year assumption. We cut our FY23-24F earnings forecasts by 19% and 11%, respectively, reduce our TP by 20% to RM0.90 (from RM1.12) but maintain our OUTPERFORM call.

Below expectations. 1QFY23 core net profit of RM0.4m missed expectations, accounting for a mere 1% each of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from lower-than-expected revenue of its construction unit which generated low gross profit, insufficient to offset the fixed operating and overhead costs at the group level. We had earlier anticipated revenue to ramp up from its significant RM780m Sarawak Sabah Link Road contract (secured back in Nov 2021) as the project moved up the S-curve.

While 1QFY23 revenue was flat YoY, gross profit improved 90% on better margins thanks to the higher share of revenue derived from its manufacturing division which commands significantly better margins compared to its construction arm. Furthermore, on lower selling and administrative expenses (-23%), it returned to the black from a loss a year ago.

YTD job wins of RM590m (comprising RM440m for construction and RM150m for manufacturing) are on track to meet our full-year replenishment assumption of RM1.1b (in-line with the company’s internal target of RM1.0b-RM1.2b). We hold the view that public contracts would see an expedited roll-out in 2HCY23 after the current government has reviewed certain public jobs awarded by its predecessor. KIMLUN’s job prospects in 2HFY23 appear promising underpinned by: (i) Pan Borneo phase 2, (ii) Johor Bahru – Singapore RTS project, (iii) flood mitigation projects (iv) Singapore Cross Island Line, (v) semiconductor factories, and (vi) MRT3. As at end-FY22, its outstanding order book stood at RM1.7b, close to its peak of RM2.4b recorded during the last construction upcycle in FY17.

Forecasts. We cut our FY23-24F earnings forecasts by 19% and 11%, respectively, to reflect slower work progress. We now foresee the momentum at its Sarawak Sabah Link Road contract to only pick up materially in 2HFY23.

Consequently, we reduce our TP by 20% to RM0.90 (from RM1.12) based on unchanged 9x PER, at a 50% discount to the 18x we ascribed to market leader GAMUDA given KIMLUN’s much smaller size. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue like KIMLUN for: (i) being a beneficiary from the continuation of public infra project rollouts, (ii) its geographically diversified earnings base with a strong presence in the precast concrete product segment in Singapore’s booming infrastructure space, (iii) the increased demand for fast turnaround factory construction from manufacturing companies diverting away from China which benefits its precast arm, and (iv) its strong earnings visibility backed by an outstanding order-book of RM1.7b which would keep it busy for the next two to three years. Maintain OUTPERFORM.

Risks to our call include: (i) sustained weak flows of construction jobs from both public and private sectors, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rising cost of building materials.

Source: Kenanga Research - 31 May 2023