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.

• Kimlun has secured from private company Rexpoint Resources a RM204.4mil building job for two apartment blocks in Selangor (we believe it is a Selangorku affordable housing project).
• We believe the latest job is the first key construction contract Kimlun has secured in FY19F, boosting its outstanding construction order book to RM2.1bil, which shall keep it busy for the next two years. We are keeping our forecasts that assume construction job wins of RM700mil annually in FY19-21F (Kimlun has guided for job wins of RM600–800mil in FY19F).
• We see the market’s recent reversion to high valuations for construction stocks as being unjustified and unsustainable. We acknowledge that the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects and the local participation requirements that come with the projects shall result in more jobs available in the market for local construction players.

• However, in the heat of the euphoria, we believe the market has not priced in enough risk premium to reflect: 1. The fact that unlike the previous ones (such as the MRT1, MRT2, LRT3 and Pan Borneo Highway), the latest mega projects are driven by world-class Chinese contractors (and Chinese funding) which probably leave the local contractors with only lowvalue/low-margin supporting roles in the projects (in order for the Chinese contractors to fulfil the local participation requirements); and 2. The fact that given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the ECRL project could be a “zero-sum game” as it impedes the government’s ability to implement other public infrastructure projects.

• Kimlun’s valuations as a small-cap construction stock are already rich at 10x forward earnings on muted sector prospects.

Source: AmInvest Research - 30 Apr 2019