Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.14 based on 8x FD FY20F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Kimlun's 1HFY19 net profit came in at 57% and 48% of our full-year forecast and the full-year consensus estimates respectively. However, as we expect a weaker 2H ahead, we consider the results within our expectations but below market expectations. During a recent visit, the company reiterated 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 is prioritising credit risk management over growing its earnings.

• Kimlun’s 1HFY19 net profit grew by 31% YoY driven largely by improved earnings from the precast concrete product division (largely underpinned by a pickup in the delivery of segments to the MRT2 project). Construction profits were flat as top line growth was negated by lower margins realised.

• At present, Kimlun’s outstanding construction order book stands at RM1.7bil which shall keep it busy for the next two years. Our forecasts assume construction job wins of RM700mil annually in FY19–21F. So far in FY19F, it has secured from private company Rexpoint Resources a RM204.4mil building job for two apartment blocks in Selangor. 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.

• We maintain our view that valuations of construction stocks, Kimlun included, have run ahead of their fundamentals in the heat of the euphoria sparked by the recent revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects.

• We believe the fact remains 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 remain rich at 9x forward earnings on muted sector prospects.

Source: AmInvest Research - 30 Aug 2019