Investment Highlights

• We cut our FY20–22F by 50%, 1% and 1% respectively and trim our fair value marginally to RM0.79 (from RM0.80) based on 8x revised FD FY21F EPS. This is in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain HOLD.

• Kimlun’s 9MFY20 net profit came in below expectations at only 13% and 12% of our full-year forecast and the full-year consensus estimates respectively. We believe the key variance against our forecasts came from Kimlun’s inability to significantly optimise its operations under the new norms.

• Its 9MFY20 net profit plunged 92% YoY as both construction activities and precast concrete product deliveries (including exports to Singapore) came to a halt during the peak of the pandemic in Mar–May 2020, and struggled to return to pre-pandemic levels thereafter.

• Meanwhile, Kimlun has thus far in FY20F secured RM420mil new construction jobs (largely building jobs for residential property projects), boosting its outstanding construction order book to RM1.2bil (vs. its annual construction churn rate of RM800mil to RM1bil). Our forecasts assume construction job wins of RM550mil annually in FY20–22F, which is consistent with Kimlun’s guidance for RM500–600mil construction job wins in FY20F.

• During a recent engagement with analysts, Kimlun expressed reservation about the outlook for 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 for viewings 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 highway, 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).

• 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 in 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 8–20x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 30 Nov 2020