Investment Highlights

• We cut our FY21–23F net profit forecasts by 17%, 5% and 4% respectively and reduce our fair value (FV) by 4% to RM0.75 (from RM0.78) 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 our 3-star rating (Exhibit 3). Maintain HOLD.

• Key highlights from Kimlun’s analyst briefing last Friday are:
  1.  Kimlun reiterated its guidance for RM500mil construction job wins in FY21F. This is despite it having only secured RM20mil worth of new jobs YTD. Similarly, it reaffirmed its guidance for new precast product orders of RM150mil to RM180mil in FY21F, despite it having only bagged RM75mil YTD. Kimlun’s optimism is premised upon an active pipeline of bids submitted for construction jobs and quotations given out for its precast products, and assuming that the pandemic will not worsen. To be prudent (with less than three months remaining before the year is out), we cut our assumption in FY21F for construction job wins to RM400mil (from RM550mil) and for new precast product orders to RM180mil (from RM200mil). At present, the order backlogs of Kimlun’s construction and precast product units stand at RM0.8bil and RM300mil respectively. Typically, construction contributes to 60–65% of group gross profit, with the balance coming from precast concrete products.
  2. Kimlun’s recent experience in scouting for public projects has not been very encouraging. As the pandemic lingers on, various administrative challenges have held back either the tender calling or contract award (in which case, the bidders are generally asked to extend the validity of their bids) of many projects. These include the Pan Borneo Highway Sarawak Phase 2 project (that stretches from Miri to Limbang and Lawas at the northern tip of Sarawak), a RM6bil non-rail/bus rapid transit system called Autonomous Rapid Transit Sarawak, as well as certain hospital projects. On a brighter note, Kimlun did get quotation requests for precast concrete components from civil contractors bidding for the Johor Bahru–Singapore Rapid Transit System project, from both sides of the Causeway.
  3. The job flow in the private sector space (mostly property-related) remains lacklustre. We gather that property developers’ new launches are still slow generally.
• We remain cautious on the local construction sector. In the newly unveiled 12th Malaysia Plan, development expenditure in 2021–2025 is projected at RM400bil, vs. RM248.5bil spent under the 11th Malaysia Plan (2016–2020). However, the spending is likely to be backloaded, i.e. with higher allocation only from 2023 when Covid-19 related spending begins to taper. Also, other macro and operational challenges remain aplenty in the sector including high national debt, contractors having to take on operating/commercial risks of mega projects by virtue of a publicprivate partnership model, intensifying competition (amidst growing presence of foreign contractors especially large state-owned Chinese contractors), and higher operating cost and risk, lower efficiency and supply-chain disruptions as the pandemic lingers on.
• We believe Kimlun’s valuations as a small-cap construction stock at 8–13x forward earnings are fair on muted prospects.

Source: AmInvest Research - 11 Oct 2021