Investment Highlights

• We maintain HOLD on Kimlun Corp (Kimlun) with a lower fair value (FV) of RM0.75/share vs. RM0.88/share previously. Our fair value for Kimlun is based on 9x FD FY23F 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.

• Kimlun reported a 1QFY22 core net loss (CNL) of RM6mil in contrast to our forecast of a net profit of RM35mil for the full year and consensus estimates of RM39mil. As such, we lower our FY22F earnings by 18%, FY23F by 15%, and FY24F by 16% to reflect lower margins resulting from higher building material costs.

• Kimlun swung into a core net loss of RM6mil in 1QFY22 due to: (i) lower construction revenue as there was a timing lag between the completion of old projects and active contribution of new projects secured; (ii) lower manufacturing & trading revenue as new sales orders secured in the later part of FY21 have yet to achieve significant revenue contribution; (iii) higher cost of raw materials; and (iv) lower margins for properties sold in the quarter.

• The group’s outstanding order book stands at RM2.1bil, comprising RM1.6bil for construction (3.2x of FY21 construction revenue) and RM0.4bil for manufacturing (2.7x of FY21 manufacturing & trading revenue). Ongoing projects include the Sarawak-Sabah Link Road construction project (RM0.8bil), supply of precast concrete pipes to the Singapore Deep Tunnel Sewerage Phase 2 (S$15mil).

• As job flows are expected to recover in 2HFY22, we make no changes to our order book replenishment assumptions for FY22F–24F. Potential job wins include Phase 2 of the Pan Borneo Sarawak, Autonomous Rapid Transit in Sarawak, Johor-Singapore Rapid Transit System, hospital projects and affordable housing projects. We also expect costs to remain elevated given the prolonged Ukraine-Russia war, hence we have reduced FY22F–FY24F EBITDA margin by 1.5%.

• Over the longer term, we believe Kimlun would benefit from the construction of the MRT3, where contracts are envisaged to be awarded in FY23F. Recall that Kimlun bagged the supply contract for the tunnel lining segment and segmental box girder worth RM525mil for both the MRT1 and MRT2.

• Challenges faced by Kimlun include: (i) rising building material costs led by an escalated/prolonged Ukraine-Russia war; and (ii) delays or shelving of mega projects

Source: AmInvest Research - 31 May 2022