Investment Highlights

• We maintain HOLD on Kimlun Corp (Kimlun) with a lower fair value (FV) of RM0.69/share (vs. RM0.75/share previously) based on FY23F PE of 9x. This is in line with our benchmark PE for small-cap construction stocks. There is no FV adjustment for ESG based on our 3-star rating.

• Kimlun’s 1HFY22 core net profit (CNP) of RM2.5mil was below expectations, accounting for 9% of our FY22F earnings and consensus. The deviation from our forecast was due to lower recognition of construction progress and higher-than-expected costs. As such, we reduce our FY22F earnings by 37% and FY23F by 8% on lower recognition assumptions of outstanding order book.

• 1HFY22 CNP plunged 74% YoY to RM2.5mil due to lower contribution from its construction and property development segments. The details are as follows:
  • Construction revenue slipped 15% YoY as: (i) the Pan Borneo Highway Sarawak project has already been completed; and (ii) timing lag between the completion of old projects and active contribution of new projects secured. Gross profit (GP) also fell due to higher raw material costs.
  • Property development revenue dropped 37% YoY to RM31mil in 1HFY22 while its GP slid 29% YoY as Phase 1 of Bukit Bayu Development was fully sold in 1QFY22. Future sales would stem from the 100 Trees Private Estate in Bandar Seri Alam, Johor.
  • Although revenue for manufacturing & trading was down 4% YoY, GP grew 46% YoY due to better margin sales orders as operations ramped up post-Covid.
     
• QoQ, 2QFY22 returned to the black with a CNP of RM8.7mil from a loss of RM6.2mil in 1QFY22 due to higher GP contribution from its construction and manufacturing/trading segments.

• The group’s outstanding order book stands at RM1.9bil, comprising RM1.6bil for construction (3.5x of FY22F construction revenue) and RM0.3bil (1.4x of FY22F manufacturing/trading revenue) for manufacturing/trading. Ongoing projects include Sarawak-Sabah Link Road (RM0.8bil) and supply of precast concrete pipes to Singapore’s Deep Tunnel Sewerage Phase 2 (S$15.4mil).

• We expect job wins to recover in 2HFY22. Hence we keep our overall FY22F order book replenishment assumption of RM650mil. Potential job wins include Phase 2 of Pan Borneo Highway Sarawak, Autonomous Rapid Transit Sarawak, Johor-Singapore Rapid Transit System, hospitals and affordable housing projects.

• We also believe that Kimlun would benefit from the construction of the MRT3, where contracts are envisaged to be awarded in FY23F. Recall that in 2012 and 2016, Kimlun bagged supply contracts worth RM525mil for the tunnel lining segments and segmental box girder portions of the MRT1 and MRT2. We also think that operating margins will stabilise as labour shortages gradually ease. In addition, steel prices have slid by 9% from the peak in Apr/May 2022.

• Challenges faced by Kimlun include: (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising building material costs and labour shortages; and (iii) delays/cost revisions of mega projects.

• We view the stock as fairly valued as it is currently trading at a fair 8.9x FY23F PE, similar to our 9x benchmark for small-cap construction stocks.

Source: AmInvest Research - 30 Aug 2022