Investment Highlights

• We maintain our HOLD call, forecasts and fair value of RM0.79 based on 8x FD FY21F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Kimlun, via a 69.5%-owned unit, is acquiring 11.1 acres of freehold land (pending the payment of premium for the conversion into commercial title) in the mature Seri Alam township in Johor (about 20km east of Johor Bahru city centre) from Seri Alam Properties Sdn Bhd for RM40.5mil cash. Kimlun plans to build “commercial properties” on the land with a GDV that has yet to be ascertained.

• At RM84 per sq ft (psf), the price tag appears to be higher than the valuation of RM58 psf for some 6.6-acre commercial leasehold land (expiring 2084) that Protasco in July 2020 proposed to sell to NSK Property Sdn Bhd in the same area, i.e. Mukim of Plentong, District of Johor Bahru. On the other hand, we are also aware of two smaller commercial land plots up for sale in the area with asking prices ranging from RM145 to RM200 psf. However, these land plots have frontage to the Pasir Gudang Highway.

• The latest land deal will increase Kimlun’s net debt and gearing of RM337.0mil and 0.47x as at 30 Sep 2020 to RM377.5mil and 0.53x that are still manageable. Based on our estimates, the new land will raise Kimlun’s existing landbank (including those in the acquisition pipe) by 4% to about 280 acres (predominantly in Klang Valley and Johor), underpinning Kimlun’s property profits (negligible at present) over the long term and creating job orders for Kimlun’s construction and pre-cast concrete product divisions. We are neutral on the latest development because: (1) we think, at best, Kimlun is paying a market price here; and (2) we expect the outlook for the local property market to remain subdued over the short to medium term.

• We maintain our view that the government will have very limited room for fiscal manoeuvre in 2021 given the elevated national debt, even before the pandemic. The government’s fiscal position is also weighed down by the economic impact of the pandemic (including reduced petroleum revenues), as well as the massive relief spending to cushion the impact of the pandemic. Under these circumstances, we believe the government 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 9–22x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 6 Jan 2021