Investment Highlights

• We raise our FY20–22F net profit forecasts by 2%, 5% and 1% respectively and upgrade our fair value by 5% to RM0.80 (from RM0.76) based on 8x revised fully-diluted FY21F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain HOLD.

• We upgrade our assumptions on job wins at both its construction and precast concrete product segments. This is partially offset by lower margins to reflect the impact from various operational restrictions under the new norms that weigh down on efficiency, such as more restricted operating hours, worker density on the site, etc.

Key takeaways from Kimlun's analyst briefing this morning are:

1. Kimlun guided for RM500–600mil construction job wins in FY20F. So far in FY20F, it has secured RM420mil new construction jobs (largely building jobs for residential property projects), boosting its outstanding construction order book to RM1.4bil. However, it would not construe this as a sign of recovery in the local building construction market as most of its clients (i.e. property developers) remain very cautious with new launches, particularly in the high-rise segment (due to the oversupply situation) and in Johor (a majority of Johoreans working in Singapore, an important group of property buyers in Johor, are not physically present in Johor to do the property viewing and execute the S&P agreement).

In the public project space, Kimlun said that it is eyeing work packages from the Central Spine Road project, an interchange job along the Senai-Desaru Expressway, some building extension work in Universiti Malaya as well as subcontracting jobs from the Coastal Highway in Sarawak. Closer to home with regards to the Johor Bahru-Singapore Rapid Transit System (RTS), Kimlun believes that it is better positioned to bid for supply contracts of precast concrete products (vs. civil work packages).

Our forecasts now assume construction job wins of RM550mil annually in FY20–22F, from RM450mil previously.

2. Kimlun has already beat its guidance for new orders for its precast concrete product segment in FY20F of RM120mil to RM150mil. YTD, it has locked in RM200mil, boosting its order backlog to RM370mil. The job wins came largely from Singapore, particularly the supply contracts of jacking pipes to the Deep Tunnel Sewerage System 2 project.

Our forecasts now assume RM200mil sales at its concrete product division annually in FY20–22F, from RM150mil previously. Typically, the division contributes to 35–40% of group gross profit.

• 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 8–11x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 28 Aug 2020