Investment Highlights

• We cut our FY19–21F net profit forecasts by 4%, 11% and 21%, reduce our FV by 11% to RM1.02 (from RM1.14) based on 8x revised FD FY20F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain UNDERWEIGHT.

• Key takeaways from the analyst briefing yesterday are:

1. Kimlun lowered its guidance for FY19F construction job wins to only RM500–600mil (vs. RM600–800mil previously). YTD, it has only secured RM270mil. For FY20F, with no recovery in sight for the local construction sector, it guided for the same number. To bring ourselves more in line with the company’s latest expectations, we now assume construction job wins of RM550mil annually in FY19–21F, vs. RM700mil previously, resulting in the earnings downgrade as mentioned.

2. Kimlun is eyeing largely building jobs for affordable housing projects and basic infrastructure works for township projects (from certain property developers who want to be all ready to roll out new launches once the property cycle levers up). It reiterated its narrative over the last 12 months 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 blue-chip property developers) who have proven to be good paymasters; and

3. Kimlun has been pre-qualified as contractor/supplier to the East Coast Rail Link (ECRL) project. However, Kimlun said that it is unaware of any tender being called by the Chinese main contractor as yet. It believes that while works on the project have resumed, these only apply to stretches which are not subject to the alignment change (which are in turn handled largely by Chinese contractors). It expects the Chinese main contractor to only tender out work packages and supply contracts to local contractors from stretches under the new alignment that is still being finalised at present.

• At present, Kimlun’s outstanding construction order book stands at RM1.7bil 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.

• 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 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 9–11x forward earnings on muted sector prospects.

Source: AmInvest Research - 26 Sept 2019