Results Highlights

• Kimlun’s 4Q2018 net profit fell 5.6% Y.o.Y to RM22.9 mln, cushioned by the higher contribution from the manufacturing & trading segment that offset the weakness in both the construction and property development segments. Revenue for the quarter contracted 16.5% Y.o.Y to RM310.7 mln.

• The group’s gross profit for 4Q2018 declined 4.2% Y.o.Y to RM45.4 mln, but still translated to a higher gross profit margin of 14.6% vs. 12.8% reported in the previous corresponding quarter, on lower provision of doubtful debts.

• For 2018, cumulative net profit slipped 10.7% Y.o.Y to RM61.1 mln. Revenue for the year, however, gained 2.7% Y.o.Y to RM1.01 bln. The reported earnings came above our expectations, accounting to 115.7% of our full year estimated net profit of RM52.8 mln. Meanwhile, the reported revenue also came above our expectation, accounting to 107.5% of our full year revenue of RM941.5 mln. The better-thanexpected earnings was due to higher contribution in the manufacturing & trading segment in fulfilling orders for the KVMRT Line 2 project and IBS components sales to Singapore.

• In 4Q2018, Kimlun’s net gearing rose to 36.1% (from 25.3% in 3Q2018) for the acquisition of an 11.7 ha. land in Johor Bahru for RM82.1 mln. A final single-tier dividend of 3.7 sen per share was declared.

Prospects

Kimlun has secured a major construction project valued at RM164.0 mln for the construction of a mixed property development project in Medini Iskandar in 4Q2018. This brings its construction orderbook replenishment rate to RM361.6 mln, making up 72.3% of our orderbook replenishment assumption of RM500.0 mln for 2018 (see Appendix 1). Moving forward, earnings visibility will be supported by an unbilled construction orderbook of approximately RM1.90 bln (construction orderbook cover ratio of 2.4x to its 2018’s segment revenue of RM801.1 mln) over the next 2-3 years. In the meantime, we have imputed an unchanged construction orderbook replenishment rate of RM400.0 mln for both 2019 and 2020.

Elsewhere, Kimlun’s manufacturing orderbook of approximately RM300.0 mln, comprising of precast components for Singapore’s rail lines, segmental girder box orders for Klang Valley MRT Line 2 and industrialised building systems (IBS) services for the RAPID project in Johor will sustain its segment’s earnings over the next three years. However, we expect orders in Malaysia remain muted in 2019 as the Klang Valley Mass Rapid Transit 3 (KV MRT3) project will be deferred until the completion of KV MRT Line 2, tentatively by July 2021, whilst new rail projects are on hold for costing review and revision.

On the property development segment, the group’s unsold property sales of approximately RM32.0 mln from The Hyve and Taman Puteri projects will be recognised upon the completion of their sales. We also expect no new property launches in 1H2019 amid the sluggish property market.

Valuation and Recommendation

As the reported earnings came above our estimates, we tweaked our earnings forecast higher by 13.0% and 15.8% to RM67.4 mln and RM73.3 mln for 2019 and 2020 respectively to account for the higher contribution from the manufacturing segment. We also maintain our BUY recommendation with a higher target price of RM1.65 (from RM1.60) as we deem its PER valuations of 6.2x and 5.7x for 2019 and 2020 respectively are attractive, being at the lower-end of the construction industry average of 9.0x.

Our target price is derived from ascribing an unchanged target PER of 9.0x to its 2019 fully diluted construction earnings and PER of 6.0x (unchanged) to its fully diluted manufacturing earnings, while its property development segment’s valuation remains unchanged at 0.6x its BV due to its relatively small-scale development projects. We continue to like Kimlun for its strong footing in the local construction industry, backed by its solid unbilled orderbook comprising of projects in Selangor and Johor Bahru, coupled with its exposure to the Malaysia and Singapore’s rail infrastructures.

Risks to our recommendation include failure to meet the targeted construction and manufacturing orderbook replenishment rate. Further tightening of credit facilities and lower household disposable income could translate to a decline in purchasing power for its future property launches.

Source: Mplus Research - 1 Mar 2019