Investment Highlights

• We maintain BUY on Kimlun Corp (Kimlun) with a lower fair value (FV) of RM0.94/share (previously RM1.08/share) based on 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.

• Kimlun’s 9MFY23 results were below expectations. The group reported a core net loss (CNL) of RM3mil in 9MFY23 compared to our earlier FY23F net profit of RM36mil and consensus’ RM25mil. Hence, we cut our FY23F earnings by 90% to account for the consecutive quarter losses and 7%-13% for FY24F-25F to account for higher operating cost in manufacturing & trading (M&T) segment.

• Kimlun’s 9MFY23 losses are attributed mainly to the M&T and property development segments. The M&T division recorded a 55% YoY fall in 9MFY23 gross profit due to higher depreciation charges and human resource expenses.

• The property development segment registered a 47% YoY plunge in earnings in the absence of sales of Phase 1 of Bukit Bayu, Seksyen U10, Shah Alam project. This was fully sold in FY22.

• Also, net interest expense was 22% YoY higher in 9MFY232 due to higher borrowings and interest rates.

• Sequentially, Kimlun marginally broke even in 3QFY23 from a core net loss of RM3mil in 2QFY23. This was mainly driven by a revenue growth of 9% in the construction segment and 23% in property development.

• On the other hand, the manufacturing and trading segment (M&T) experienced a 9% QoQ revenue decline due to slower completion of projects, as most are still at the planning and product design submission stage.

• Outstanding order book rose 5% QoQ to RM2.2bil as at 30 September 2023 compared to RM2.1bil as at 30 June 2023. This comprised RM1.9bil for construction (1.8x FY24F segment revenue) and RM0.3bil for M&T (1x of FY24F division 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 win RM1bil worth of jobs in FY23F, in line with the group’s target of RM1bil-RM1.3bil. Year-to-date, Kimlun has secured RM880mil in the new order book and we expect the balance to be secured by the end of FY23F. 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 early-FY24F. Recall that in 2012 and 2016, Kimlun won RM524mil contracts 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 units of semi-detached house in Bandar Seri Alam, Johor while Phase 2 of Bukit Bayu development, which will command a GDV of at least RM48mil, comprise 16 units of bungalows in Shah Alam. These will be launched by the end of FY23F.

• 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 7.7x, which is below our 9x benchmark for small-cap construction stocks.

Source: AmInvest Research - 30 Nov 2023