Investment Highlights

• We maintain our forecasts and fair value of RM0.91 based on 9x fully-diluted FY22F EPS, in line with our benchmark forward target PE of 9x 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.

• During an analyst briefing yesterday, Kimlun reiterated its guidance for RM500mil construction job wins in FY21F (vs. our assumption that is slightly higher at RM550mil). So far in FY21F, it has yet to secure any significant contract while its outstanding construction order book currently stands at RM1.1bil.

• Kimlun hopes to secure new jobs in Sarawak so that the resources to be freed up from its RM1.46bil Pan Borneo Highway (PBH) Sarawak contract (currently 90% completed), could be redeployed. It is eyeing work packages from PBH Sarawak Phase 2 that stretches from Miri to Limbang and Lawas at the northern tip of Sarawak (see Exhibit 1 for the alignment). It is also bullish on a RM6bil project known as Autonomous Rapid Transit Sarawak which is essentially a non-rail/bus rapid transit system to be added alongside the existing roads, and hence involving extensive road widening works.

• Closer to its home in Peninsular Malaysia, it is eyeing work packages from Central Spine Road, the Johor Bahru– Singapore Rapid Transit System (RTS) and Iskandar Malaysia bus rapid transit.

• In the private sector space, Kimlun has a tender book of about RM1bil, largely building jobs tendered out by property developers. However, these property developers have been postponing the contract awards (and asking the bidders to extend the validity of the tenders they have submitted). Weighed down by the lingering pandemic, the condition is still not conducive for them to aggressively put onto the market new property launches.

• For the up-and-coming MRT3 project. Kimlun will participate as a supplier of precast concrete products (which it also did for the MRT1 and MRT2), as well as potential civil work contractor.

• If the MRT3 does get off the ground and in the absence of new players, Kimlun is confident that it could secure MRT3 orders for pre-cast concrete products (namely, segmental box girders, tunnel lining segments, parapet walls, staircases, etc) comparable to those of the MRT2. To recap, Kimlun secured pre-cast concrete product orders with a total value of RM281mil from the MRT2 3–4 years ago.

• Kimlun also said that it has accumulated a satisfactory track record (from its participation in the MRT1 and MRT2) to be pre-qualified to bid for MRT3 civil work packages.

• Meanwhile, at present, the order backlog at its precast concrete product segment stands at RM300mil. For FY21F, it reiterated its guidance for new orders of RM150mil to RM180mil, largely coming from Singapore (vs. our assumption that is slightly higher at RM200mil). Typically, the division contributes to 35–40% of group gross profit.

• The recent news on the MRT3 potentially commencing work in the second half of the year aside, the fact remains that the government will have very limited room for fiscal manoeuvre given the elevated national debt, 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.

• We believe Kimlun’s valuations as a small-cap construction stock at 8–10x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 23 Apr 2021