Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.14 based on 8x FD FY19F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Key takeaways during our recent visit to the company are:

1. Kimlun did not appear to be too excited over the prospects of the revival of the East Coast Rail Link (ECRL) project. Kimlun said that before the suspension of the project prior to the 14th general election (GE14), it had been shown price quotations for the supply of various precast concrete products to the project. It decided not to pursue as it found them highly unattractive;

2. It reiterated its narrative six months ago that the local construction and building material sectors are bracing for a very challenging time ahead (particularly, in terms of cash flow management), and hence, it prioritises credit risk management over growing its earnings. It will focus on existing clients (mostly bluechip property developers) who have proven to be good paymasters. It has not set itself a hard target for order book replenishment in FY19F;

3. Having said that, it is hopeful for new construction job wins to the tune of RM600–800mil in FY19F (which is in line with our assumption of RM700mil annually in FY19–21F). The new jobs are most likely to come from affordable housing projects and basic infrastructure works for township development. Kimlun only secured new construction contracts worth about RM600mil in total in FY18.

• At present, Kimlun’s outstanding construction order book stands at RM1.9bil which shall keep it busy for the next two years. Similarly, its precast concrete product division has an order backlog of about RM300mil that should also keep it busy over the next two years as well.

Source: AmInvest Research - 14 Mar 2019