Investment Highlights

•  We maintain our HOLD call, forecasts and fair value of RM0.76 based on 8x FD FY21F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.
• Kimlun is subscribing to a 49% stake in Bayu Damai Sdn Bhd (Bayu Damai) for RM40mil cash. Bayu Damai is finalising the acquisition of 43.5 acres of freehold agriculture land in Cheras, KL (next to an established property development project called Alam Damai) for RM95mil. It has been earmarked for the development of high-rise residential towers and shop units with an estimated GDV of RM2.2bil (vs. a gross development cost of RM1.94bil).
• More importantly, Bayu Damai has already secured the development order from Dewan Bandaraya KL for the project which is only expected to commence in 2022 and shall take 10–15 years to complete (we therefore maintain our forecasts).
• Bayu Damai started the acquisition process for the land in 2017 and we understand that the price tag of about RM50 per sq ft was fairly consistent with the independent valuations at that point. We are unable to find any close comparison in the absence of large land tracts for sale in this highly mature area. Nonetheless, at RM50 per sq ft, the land is priced at a premium to an asking price of RM31 per sq ft for some 3.6 acres of residential land up for sale in Bandar Mahkota Cheras nearby. We believe the premium is justifiable given the location of the land in the greener, more scenic part of Cheras, right at the hillside.
• An important point to note is that Kimlun’s partner in the project (a private company owned by two individuals) is subscribing to its 51% in Bayu Damai for only RM9.9mil cash. The much favourable equity subscription terms are to reflect the efforts it has put in to secure the development order (which is one of the most critical steps in any project development project).
• The deal has a number of investment merits from the standpoint of Kimlun as a budding property developer and a seasoned contractor/manufacturer of pre-cast concrete products. The new project will diversify Kimlun’s landbank, currently concentrated largely in Johor and Shah Alam. The new project will also create job orders for Kimlun’s construction and pre-cast concrete product divisions.
• Nonetheless, we are neutral on the latest development as we expect the outlook for the local property market to remain subdued over the short to medium term. The acquisition will increase Kimlun’s net debt and gearing of RM399mil and 0.55x as at 31 Mar 2020 to RM439mil and 0.6x, which are still manageable.
• Meanwhile, Kimlun has thus far in FY20F 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, 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, such as the MRT3 and the KL–Singapore high-speed rail.
• Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.
• We believe Kimlun’s valuations as a small-cap construction stock at 8–11x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 11 Aug 2020