Investment Highlights

• We maintain BUY on Kimlun Corp (Kimlun) with a lower fair value (FV) of RM1.08/share (vs. RM1.36/share previously) based on FY24F PE of 9x, 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.

• Following a briefing last week, we raise Kimlun’s FY23F net profit by 9% mainly due to higher order book assumption but reduce FY24F-25F earnings by 13%-21% to account for higher cost of sales (>85% of revenue), driven by inflationary impact on old projects together with higher material, commodity and energy costs, exacerbated by rising finance cost.

• We raise FY23F total order book replenishment assumption from RM680mil to RM1.3bil to be in line with management’s target of RM1.0bil to RM1.3bil.

• For the construction/engineering segment, management’s FY23F replenishment target is RM1bil. Kimlun secured RM740mil for new projects in 1HFY23. The balance of RM260mil is expected to be awarded in 2HFY23. Jobs won in 1HFY23 included 2 blocks of service apartments in Selangor (RM238mil) and 1 block of affordable apartment and 166 units of double-storey linked houses in Johor Bahru, Johor (RM95mil).

• For the manufacturing/trading segment, Kimlun secured RM170mil jobs in 1HFY23, which made up 63% of the replenishment target of RM270mil. We expect the momentum to sustain in 2HFY23 as the segment transitions from planning/design to manufacturing. Demand is expected to be underpinned by the strong pipeline of public housing projects resulting from Singapore Housing Development Board (HDB) ramping up Built-to-Order (BTO) flats.

• Management expects the precast plant to operate at 100% of its capacity in FY24F vs. 63% current level of utilisation. The company is mulling to set up a new precast plant in Ulu Choh, Johor early November this year in addition to existing plants in the same town and Seremban, Negeri Sembilan. The cost of the new plant is estimated to be between RM30mil to RM40mil which will be financed by higher utilisation of banking facilities.

• Kimlun’s outstanding order book rose by 20% to RM2.1bil as at 30 June 2023 from RM1.8bil as at 31 Mar 2022. This comprised RM1.8bil for construction (2.5x FY23F segment revenue) and RM0.3bil for M&T (1.2x of FY23F division revenue). Ongoing projects include Sabah-Sarawak Link Road (RM780mil), main building works for 2 blocks of apartments in Selangor (RM238mil) and supply of precast concrete components for the Singapore Deep Tunnel Sewerage Phase 2 (S$23.9mil) and Singapore MRT projects (S$45mil). Going forward, potential jobs include expansion of BRT in Johor and Klang Valley, Pan Borneo Highway, Johor-Singapore Rapid Transit System, highway upgrading works in Johor and affordable housing projects in Malaysia.

• We believe that Kimlun would benefit from the MRT3 project with subcontracts expected to be awarded by 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 launch of 100 Trees Private Estate (100 Trees) and Phase 2 of the Bukit Bayu project. The 100 Trees development, which has a GDV of RM61mil, comprises 60 semi-detached houses in Bandar Seri Alam, Johor while Phase 2 of Bukit Bayu development, which will command a GDV of RM48mil, consists of 16 bungalow units in Shah Alam. These will be launched in 2HFY23. Management is also planning to launch Bukit Bayu Phase 3, which will have a GDV of RM42mil, in FY24F.

• 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 6.9x, below the average PE of 9x for small-cap construction stocks in Malaysia.

Source: AmInvest Research - 22 Sept 2023