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 FY19 net profit came in within consensus estimates but beat our forecast by a whopping 18%. The key variance against our forecast came from unexpectedly strong construction profits in the final quarter, we believe, due to lumpy earnings from account finalisation.

• Kimlun’s FY19 net profit eased by 4% YoY as improved earnings from the precast concrete product division (largely underpinned by a pickup in the delivery of segments to the MRT2 project), were offset by lower construction profits as topline growth was negated by lower margins realised.

• At present, Kimlun’s outstanding construction order book stands at RM1.3bil which shall keep it busy for the next two years. Our forecasts assume construction job wins of RM550mil annually in FY20–22F, which represent a slight improvement over the RM413mil achieved during a relatively drought year in FY19. Meanwhile, 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. Not helping either, is the current political impasse that may stall the award of public projects.

• Acknowledging that the local construction and building material sectors are bracing for a very challenging time ahead (particularly, in terms of cash flow management), Kimlun is prioritising credit risk management over growing its earnings.

• Kimlun’s valuations as a small-cap construction stock remain rich at 9–10x forward earnings on muted sector prospects.

Source: AmInvest Research - 28 Feb 2020