Investment Highlights

• We are keeping relatively unchanged our FY21–22F forecasts and maintain our 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. There is no adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 4). Maintain HOLD.

• Kimlun’s FY20 core net profit of RM14.3mil (excluding one off items particularly impairment on development land) beat our forecast and consensus estimates by 17% and 23% respectively. The variance against our forecast came largely from better-than-expected profits from precast products as deliveries were skewed towards higher margin products. We are keeping our more moderate margin assumption for precast products in our forecasts from FY21F.

• Its FY20 core net profit plunged 76% 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 had struggled to return to pre-pandemic levels thereafter.

• In FY20, Kimlun secured construction and precast product orders worth RM464mil and RM230mil respectively. At present, its construction and precast product order backlogs stand at RM1.1bil and RM300mil respectively.

• It guided for new construction and precast product new order targets of RM500mil and RM150–180mil respectively in FY21F. Our assumptions are slightly above these at RM550mil and RM200mil for new construction and precast product orders respectively.

• During a recent engagement with analysts, Kimlun expressed reservation about the outlook for the local building construction market. This is because 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, 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 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).

• 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 has been weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic. All these have culminated in Fitch Ratings’ Dec 2020 downgrade of Malaysia’s long-term foreign-currency issuer default rating to ‘BBB+’ from ‘A-‘, on the heels of S&P Global Ratings’ June 2020 downgrade of Malaysia’s outlook to negative from stable).

• Under these circumstances, we believe the government is unlikely to roll out new public infrastructure projects in a major way over the short term. Also, given the suspension of parliament following the declaration of a state of emergency until 1 Aug 2021, the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025) could now be put on the back burner.

• We believe Kimlun’s valuations as a small-cap construction stock at 7–9x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 29 Mar 2021