Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.02 based on 8x FD FY20F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Kimlun's 9MFY19 net profit came in at 84% and 69% of our full-year forecast and the full-year consensus estimates respectively. However, as we expect a weaker 4Q ahead, we consider the results within our expectations but below market expectations.

• Kimlun’s quarterly net profit had been on a declining trend thus far in FY19, easing from RM15.9mil in 1Q to RM13.4mil in 2Q and RM12.3mil in 3Q. 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 9MFY19 net profit still grew by 9% 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 relatively flat as topline growth was negated by lower margins realised.

• At present, Kimlun’s outstanding construction order book stands at RM1.5bil which shall keep it busy for the next two years. So far in FY19F, it has secured RM270mil. Our forecasts assume construction job wins of RM550mil annually in FY19–21F. Similarly, its precast concrete product division has an order backlog of about RM240mil that should also keep it busy over the next two years as well.

• Given the still elevated national debt, we believe the government has very limited room for fiscal manoeuvre which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term.

• Kimlun’s valuations as a small-cap construction stock remain rich at 9–11x forward earnings on muted sector prospects.

Source: AmInvest Research - 29 Nov 2019