Investment Highlights

• We cut our FY21–23F net profit forecasts by 27%, 14% and 12% respectively and reduce our fair value (FV) by 14% to RM0.78 (from RM0.91) based on 9x revised FD FY22F EPS, in line with our benchmark forward target PE of 9x for small-cap construction stocks. There is no FV adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 4). Maintain HOLD.

• Kimlun’s 1HFY21 core net profit of RM9.3mil came in below expectations at only 26% and 29% of our full-year forecast and the full-year consensus estimates respectively. We believe the variance against our forecast came largely from sub-optimal construction activities and the disruption in building material supply on tightened pandemic restrictions as Covid-19 infections surged.

• Nonetheless, its 1HFY21 was a return to the black at the net level vs. in the red a year ago, as both construction activities and precast concrete product deliveries (including exports to Singapore) adjusted better to operating under the new norms vs. a year ago.

• Our earnings downgrade is to reflect a more prolonged and challenging path to normalisation of operations.

• During a recent analyst briefing, 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 RM0.8bil.

• It is currently pursuing new jobs in Sarawak such as the Pan Borneo Highway (PBH) Sarawak Phase 2 project (that stretches from Miri to Limbang and Lawas at the northern tip of Sarawak) and a RM6bil non-rail/bus rapid transit system called Autonomous Rapid Transit Sarawak. In Peninsular Malaysia, it is eyeing work packages from Central Spine Road, the Johor Bahru–Singapore Rapid Transit System (RTS), Iskandar Malaysia bus rapid transit and private-sector building jobs.

• 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.

Source: AmInvest Research - 21 Sept 2021