Results Highlights

• Kimlun’s 1Q2019 net profit added 26.0% Y.o.Y to RM15.9 mln, lifted by the higher contribution from the construction and manufacturing & trading segments that offset the weakness in the property development segment. Revenue for the quarter rose 44.2% Y.o.Y to RM310.7 mln.

• The reported earnings came within our expectations, accounting to 25.3% of our full year estimated net profit of RM63.0 mln. Meanwhile, the reported revenue came above our expectation, accounting to 31.5% of our full year revenue forecast of RM1.01 bln. The better-than-expected revenue was due to higher contribution from the manufacturing & trading segment with deliveries to the KVMRT Line 2 project and quarry products supplied.

• Although the group’s gross profit for 1Q2019 climbed 26.6% Y.o.Y to RM34.6 mln, gross profit margin was lower at 10.9% vs. 12.4% reported in the previous corresponding quarter, dragged down by higher contribution from the Pan Borneo Highway project that yield lower margins.

• In 1Q2019, Kimlun’s net gearing rose to 45.0% (from 36.1% in 4Q2018) to cater for its capex expansion and working capital amid the rising work orders. No dividends were declared for the quarter as the group traditionally declares dividend in the final quarter of financial year end.

Prospects

After a somewhat quiet 1Q2019, Kimlun has secured its first major construction project for the construction of two apartment blocks at Selangor valued at RM204.4 mln. This brings its construction orderbook replenishment rate to 40.9% 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 RM1.70 bln (construction orderbook cover ratio of 2.1x to its 2018’s segment revenue of RM801.1 mln) over the next 2-3 years.

In the meantime, Kimlun’s manufacturing orderbook of approximately RM300.0 mln, comprising of precast components for Singapore’s rail lines, segmental girder box orders for the KVMRT Line 2 and Industrialised Building Systems (IBS) services for the RAPID project in Johor will sustain the segment’s earnings over the next three years. Following the revival of some mega infrastructure projects, we reckon Kimlun’s position as one of the leading building materials supplier in Malaysia makes it a strong contender, backed by the experienced in delivery of segmental box girders and tunnel lining segment for the KVMRT1 and KVMRT2 projects.

On the property development segment, the group’s unsold property units from The Hyve and Taman Puteri projects will be recognised upon the completion of their sales. We also expect no new property launches in 2H2019, premised to the prolonged slowdown in the property market.

Valuation and Recommendation

As the reported earnings were within our estimates, we made no changes to our earnings forecast and we maintain our BUY recommendation with an unchanged target price of RM1.65. We reckon that prospective PER valuations of 7.3x and 6.3x for 2019 and 2020 respectively are still 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 - 31 May 2019