Investment Highlights

• We cut our FY20–22F net profit forecasts by 39%, 2% and 2% respectively, and reduce our FV by 3% to RM0.76 (from RM0.78) based on 8x revised FD FY21F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Downgrade to HOLD from BUY.

• Kimlun's 1QFY20 net profit missed expectations at only 17% and 15% of our full-year forecast and the full-year consensus estimates respectively. The main culprit was the 2-week impact from the movement control order (MCO) during 1Q which turned out to be much more damaging than expected (and shall continue to wreak havoc at least until 2Q, while the export of its precast concrete products to Singapore shall also be affected by the city state’s circuit breaker measures from 7 Apr to 1 June 2020). We have reflected this in our earnings downgrade.

• Kimlun’s 1QFY20 net profit plunged 59% YoY as despite construction and manufacturing activities were halted from 18 Mar 2020, Kimlun had to continue incurring fixed overheads.

• Our forecasts assume construction job wins of RM450mil annually in FY20–22F, which represent a slight improvement over RM413mil achieved during a relatively drought year in FY19. So far in FY20F, the company has secured new jobs worth about RM250mil, boosting its outstanding construction order book to RM1.4bil (vs. its annual construction churn rate of RM800mil to RM1bil). Meanwhile, its precast concrete product division has an order backlog of about RM280mil that should also keep it busy over the next two years.

• Given the still elevated national debt and reduced petroleum revenues, 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. 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.

• After a significant recovery in its share price from the lows in March 2020, Kimlun’s valuations as a small-cap construction stock at 8–10x forward earnings are no longer at bargain levels on muted growth prospects.

Source: AmInvest Research - 29 Jun 2020