Investment Highlights

• We maintain BUY on Kimlun Corp (Kimlun) with an unchanged fair value (FV) of RM1.00/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 FY23 results were below expectations with core ne profit (CNP) of RM2mil vs. our forecast of RM3mil and consensus’ RM5mil. However, we raise our FY24F-25F earnings by 7%-28% on assumptions of higher revenue recognition and orders secured for new projects.

• The group’s FY23 core net profit plunged 93% YoY despite a 13% increase in revenue to RM853mil. The weak bottomline stemmed from a 32% drop in revenue from the manufacturing & trading (M&T) division, which caused its gross margin to retreat 6%-point to 14.8% due to higher payroll and materia costs.

• The construction sector posted a stellar result with gross profit surging 3.7x YoY to RM25mil in FY23 from RM6.7mil in FY22.

• Kimlun’s FY23 property development revenue shrunk 25%YoY to RM24mil as ongoing projects has been mostly taken up coupled with the lack of new launches. Nonetheless we believe the property segment will contribute a highe revenue in FY24F with the launch of a service apartment with a gross development value (GDV) of RM300mil, expected in 2HFY24.

• Sequentially, Kimlun’s 4QFY23 core net profit surged to RM5mil from a mere RM0.7mil in 3QFY23 as revenue grew 24%, contributed by the construction (+54%) and M&T (+2.5x divisions.

• Looking forward, we are positive for an earnings growth in FY24F with potential jobs such as MRT 3 subcontracts, flood mitigation projects, Penang LRT and Singapore Housing Development Board’s (HDB) flats.

• Outstanding order book rose 2% QoQ to RM2.2bil as at end FY23 from RM2.1bil as at 30 September 2023. This comprised construction orders of RM1.9bil (1.2x FY24F segmen revenue) and M&T of RM0.

• Several ongoing projects within Kimlun’s orderbook include Sabah-Sarawak Link Road (RM800mil), main building works for 2 blocks of apartments in Selangor (RM238mil) and supply of precast concrete components in Singapore for Singapore Deep Tunnel Sewerage Phase 2 (S$24mil) and Singapore MRT project (S$51mil).

• Kimlun achieved its target to win RM1bil worth of jobs in FY23 and targets RM1bil-RM1.3bil in FY24F. We believe Kimlun is well positioned to win more jobs such as Phase 2 of Sabah-Sarawak Link Road, Pan-Borneo Highway, Johor-Singapore Rapid Transit System, road upgrading works in Johor and affordable housing projects.

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

• We believe that the stock is undervalued as it is currently trading at a FY24F PE of 7.6x, which is below our 9x benchmark for small-cap construction stocks.

Source: AmInvest Research - 29 Feb 2024