Investment Highlights

• We maintain BUY on Kimlun Corp (Kimlun) with an unchanged fair value (FV) of RM1.17/share 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 ESG rating.

• In spite of Kimlun’s core net loss of RM1mil in 1QFY23, we deem the results to be within expectations as we expect the group’s earnings to improve over the following quarters on the back of a higher recognition of progress billings. Hence, we make no changes to our FY23F-25F earnings for now. Currently, we are forecasting a net profit of RM52mil for Kimlun in FY23F vs. consensus’ RM47mil.

• On a YoY basis, Kimlun’s CNL narrowed to RM1mil in 1QFY23 from RM6mil in 1QFY22 due to stronger gross profit (GP) contribution from the construction and manufacturing/trading (M&T) segments.

• Revenue for construction segment inched up to RM120mil (+9% YoY) in 1QFY23 due to acceleration of construction progress of new projects secured in FY22. Hence, the segment swung into the black with a gross profit of RM4mil in 1QFY23 from a loss of RM2mil in 1QFY22.

• Meanwhile, the M&T segment’s revenue improved to RM48mil (+43% YoY) in 1QFY23. Coupled with quicker production progress of orders in hand, GP surged to RM10mil (+90% YoY).

• Property development segment’s revenue fell 84% YoY to RM5mil in 1QFY23 as Phase 1 of Bukit Bayu had been fully sold. This resulted in a 78% YoY decline in GP to RM1mil.

• In 1QFY23, Kimlun dipped into red with a CNL of RM1mil vs. a CNP of RM12mil in 4QFY22. This was due to lower revenue contribution from the M&T segment (-40% QoQ). Going forward, however, we expect M&T earnings to improve, boosted by favourable SGD/MYR movements.

• Outstanding order book grew marginally by 3% to RM1.78bil as at 31 Mar 2023 from RM1.72bil as at 31 Dec 2022. The order book of RM1.78bil comprised RM1.42bil for construction (2x FY23F construction revenue) and RM0.36bil for M&T (1.6x of FY23F M&T revenue).

• Ongoing projects include Sabah-Sarawak Link Road (RM800mil), main building works for 2 blocks of apartments in Selangor (RM200mil) and supply of precast concrete components in Singapore for Singapore Deep Tunnel Sewerage Phase 2 (S$23.9mil) and Singapore MRT project (S$50.8mil).

• 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, Johor-Singapore Rapid Transit System, road upgrading works in Johor, affordable housing projects.

• 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 RM48mil, comprise 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 - 31 May 2023