Investment Highlights

• We maintain BUY on Kimlun Corp (Kimlun) with a higher fair value (FV) of RM1.36/share (previously RM1.17/share) based on a rolled-forward FY24F PE of 9x. This is in line with our benchmark for small-cap construction stocks. There is no FV adjustment for ESG based on our neutral 3-star ESG rating.

• We deem Kimlun’s 1HFY23 core net loss (CNL) of RM4mil as below expectation compared to our earlier FY23F net profit of RM51mil and consensus’ RM43mil. Hence, we cut our FY23F earnings by 35%.

• Kimlun’s 1HFY23 CNL loss stemmed from higher other operating income and selling/administrative expenses, which slashed EBITDA to RM3mil vs. 1HFY22 EBITDA of RM33mil.

• However, 1HFY23 revenue showed an increase of 4% YoY mainly from the construction segment (+11% YoY) driven by acceleration of construction progress for new projects coupled with higher external sales revenue in the manufacturing and trading segment (+12% YoY).

• Sequentially, 2QFY23 revenue rose 17% to RM209mil, driven by construction (+24%) and property development (+15%). In contrast, the manufacturing and trading segment (M&T) experienced a slight 0.4% revenue decline due to some lag for completion of fast-track and new projects, as most are still at planning and product design submission stage.

• Nevertheless, 2QFY23 CNL worsened to RM3mil from RM0.6mil in 1QFY23, attributed to higher finance cost from the hikes in interest rate and higher utilisation of banking facilities.

• Outstanding order book rose by 20% to RM2.14bil as at 30 June 2023 from RM1.78bil as at 31 Mar 2022. This comprised RM1.84bil for construction (3x FY23F segment revenue) and RM0.3bil for M&T (1.4x of FY23F division revenue)

• Ongoing projects includes 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 and 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 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 semidetached houses in Bandar Seri Alam, Johor while Phase 2 of Bukit Bayu development, which will carry a GDV of at least RM48mil, comprise 16 bungalow units in Shah Alam. These will be launched in 2HFY23.

• 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 FY24F PE of 5.5x, which is below our 9x benchmark for small-cap construction stocks.

Source: AmInvest Research - 30 Aug 2023