Investment Highlights

• We maintain BUY on Kimlun with a higher fair value (FV) of RM1.17/share (vs RM1.09/share previously) based on a FY23F PE of 9x. This is in line with our benchmark for small-cap construction stocks. There is no FV adjustments for ESG based on our 3-star rating.

• Kimlun posted FY22 core net profit (CNP) of RM34mil, which was above expectations, exceeding our FY22F earnings by 48% and street estimates by 33%. The deviation came mainly from a higher-than-expected margin in the manufacturing & trading (M&T) segment. Hence, we raise our earnings estimates for FY23F by 8% and FY24F by 2%.

• Kimlun swung into profitability with a CNP of RM34mil in FY22 compared to a CNL of RM4mil in FY21. This was supported by a strong M&T segment, which offset weaker earnings from the construction and property development segments.
  • M&T segment’s gross profit (GP) tripled YoY due to higher-margin sales orders. The division also benefited from higher production volumes and favourable SGD/MYR movements.
     
  • Although construction revenue improved to RM538mil (+7% YoY) in FY22, GP fell 60% YoY to RM7mil due to higher raw material costs.
     
  • Property development segment’s GP fell 34% YoY to RM4mil in FY22 in tandem with a 30% decline in revenue. Revenue fell as Phase 1 of Bukit Bayu Development was fully sold in 1QFY21.
     
• 4QFY22 CNP fell 21% QoQ to RM17mil, dragged by weaker GP (-46% QoQ) from the M&T segment. The division’s earnings were affected by the appreciation of the MYR against the SGD.

• Outstanding order book fell marginally to RM1.72bil as at 31 Dec 2022 from RM1.74bil as at 30 Jun 2022. The order book of RM1.72bil consists of RM1.37bil for construction (2.1x of FY23F construction revenue) and RM0.35bil for M&T (1.8x of FY23F M&T revenue)

• Ongoing projects include Sabah-Sarawak Link Road (RM0.8bil), main building works for 2 blocks of apartments in Selangor (RM0.2bil) and supply of precast concrete components in Singapore (S$41.2mil).

• Kimlun added RM460mil (Construction: RM280mil; M&T: RM180mil) to its order book in FY22, which was 15% higher than our estimated RM400mil. We expect Kimlun to bag RM680mil worth of jobs in FY23F, in line with the group’s target of RM680mil-RM800mil. Potential jobs are Pan Borneo Highway, Autonomous Rapid Transit Sarawak, Johor-Singapore Rapid Transit System, road upgrading works in Johor, affordable housing projects and supply of precast concrete in Singapore.

• We also believe that Kimlun would benefit from the construction of MRT3, where subcontracts will be awarded in late-2023. Recall that in 2012 and 2016, Kimlun bagged sizeable supply contracts of RM524mil involving tunnel lining segments and segmental box girders for MRT1 and MRT2.

• We expect FY23F property sales to be supported by the launches of 100 Trees Private Estate (100 Trees) and Phase 2 of Bukit Bayu. The 100 Trees development with a GDV of RM61mil comprises 60 units of semi-detached house in Bandar Seri Alam, Johor while Phase 2 of Bukit Bayu development, which will carry a GDV of at least RM40mil, comprises 16 units of bungalows in Shah Alam. These will be launched in 2QFY23.

• Risks are (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising costs; and (iii) shelving of mega projects.

• We believe that the stock is undervalued as it is currently trading at a FY23F PE of 6x, which is below our 9x benchmark for small-cap construction stocks.

Source: AmInvest Research - 1 Mar 2023