Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM0.76 based on 8x FD FY21F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Key takeaways from Kimlun's analyst briefing yesterday are: 1. Kimlun raised its guidance for its new order target for the precast concrete product segment in FY20F to RM120mil–RM150mil (from RM90mil–RM120mil previously) on the back of strong YTD job wins of RM80mil, boosting its order backlog to RM280mil (that should keep it busy over the next two years). The job wins came largely from Singapore, particularly, the supply contracts of jacking pipes to the Deep Tunnel Sewerage System 2 project. We are keeping our forecasts that assume about RM150mil sales at its concrete product division annually in FY20–22F. In FY19, the division contributed to 35–40% of group gross profit; and 2. Kimlun does not believe a guidance for construction job wins in FY20F will be meaningful as its key clients, i.e. property developers, are putting on hold new property launches (largely landed residential projects in the Klang Valley and Johor, planned prior to the pandemic) amidst the economic uncertainty. Nonetheless, so far in FY20F, it has secured RM280mil new construction jobs (largely building jobs for residential property projects), boosting its outstanding construction order book to RM1.4bil (vs. its annual construction churn rate of RM800mil to RM1bil). 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.

• 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.

• We believe Kimlun’s valuations as a small-cap construction stock at 8–10x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 1 Jul 2020