Investment Highlights

• We maintain our forecasts but cut our FV by 13% to RM1.00 (from RM1.13) based on 8x fully-diluted FY19F EPS (from 9x previously), which is still in line with our benchmark forward target PE of 7-10x for small-cap construction stocks. The downgrade in earnings multiple is to reflect the continuing sector derating. Maintain UNDERWEIGHT.

• Kimlun has secured a RM164mil contract from Sunway Iskandar Sdn Bhd for the construction of a commercial block and an apartment block in Medini Iskandar, Johor Bahru, with a construction period ending June 2021.

• The latest job has boosted its YTD construction job wins to RM564mil and its outstanding construction order book to RM1.86bil, which shall keep it busy for the next two years. We are keeping our forecasts that assume construction job wins of RM700mil annually in FY18-20F.

• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We see better earnings visibility at its precast concrete product division that contributed to 20-40% of group profits in FY16-17. This is because the depleting new orders locally (arising from the cancellation of various mega infrastructure projects), should be cushioned by those from Singapore driven by new infrastructure projects such as the North-South Corridor Expressway and Jurong Region Line, which are largely elevated (that requires segmental girder boxes) and underground (that requires tunnel lining segments or TLS).

• YTD, the division has secured new orders worth RM163mil, of which 80% are from Singapore comprising TLS for the Circle Line extension and North-East Line, and pre-cast concrete building components for a high-tech manufacturing plant. Its order backlog is now RM400mil and that should also keep it busy over the next two years.

• At about 9x its forward earnings on muted growth prospects based on the current share price, we believe the upside is capped for a small-cap construction stock like Kimlun.

Source: AmInvest Research - 31 Oct 2018