Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.00 based on 8x FD FY19F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Kimlun's 9MFY18 net profit came in at 86% of our fullyear forecast. However, we consider the results within our expectations as Kimlun’s quarterly performance does fluctuate subject to the number of accounts for projects/orders finalised during the quarter (that will normally boost profits). As against the market expectations, Kimlun’s 9MFY18 results disappointed at only 67% of full-year consensus estimates.

• 9MFY18 net profit declined by 14% YoY as improved earnings from the precast concrete product division were more than offset by weaker construction profits (largely due to reduced margins).

• Kimlun’s YTD construction job wins stand at RM564mil, vs. our order book replenishment assumption of RM700mil annually in FY18-20F. Meanwhile, its outstanding construction order book stands at RM1.8bil which shall keep it busy for the next two years.

• Meanwhile, YTD, its precast concrete product division has secured new orders worth a total of RM163mil, of which 80% are from Singapore, comprising tunnel lining segments for the Circle Line extension and North-East Line, and pre-cast concrete building components for a high-tech manufacturing plant. At present, its order backlog stands at RM400mil that should also keep it busy over the next two years as well.

• 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.

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

Source: AmInvest Research - 30 Nov 2018