Investment Highlights

• We cut our FY20–22F net profit forecasts by 13%, 17% and 9% respectively, and reduce our FV by 24% to RM0.78 based on 8x revised FD FY21F EPS (from RM1.02), in line with our benchmark forward target PE of 8x for small-cap construction stocks. However, we upgrade our call to BUY from UNDERWEIGHT as value has emerged after the recent indiscriminate selldown on the stock.

• The earnings downgrade is largely to reflect lower annual construction job wins of RM450mil in FY20–21F (vs. RM550mil we assumed previously), in line with the company’s latest guidance for RM400–500mil replenishment in construction jobs in FY20F. So far in FY20F, the company has secured new jobs worth about RM100mil, boosting its outstanding construction order book to RM1.3bil (vs. its annual construction churn rate of RM800mil to RM1bil). Meanwhile, its precast concrete product division’s earnings should be sustained by an order backlog of about RM240mil (that should so keep it busy over the next 12 months), coupled with consistent order flow especially from infrastructure projects in Singapore.

• In FY19, construction and precast concrete products made up about 60% and 40% of total profits respectively.

• 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 and delivering its existing order backlogs, over growing its earnings.

• We believe the recent change in the political landscape has not altered the subdued outlook for the local construction sector. Given the still elevated national debt, coupled with the recent collapse of oil prices that will hurt petroleum revenues, we believe the government has very limited room for fiscal manoeuvre. This means that it is unlikely to roll out new public infrastructure projects in a major way over the short term, such as the MRT3 and the KL–Singapore high-speed rail.

• Similarly, there are limited building jobs to go around in the market given the still soft condition in the local property market. The prospects for a recovery in the property market look more leak now with the global economy moving closer to a severe downturn amidst the Covid-19 pandemic.

• However, at only 5x forward earnings, we believe the market has over-reacted to the downside as far as Kimlun’s share price is concerned.

Source: AmInvest Research - 24 Mar 2020