Results Highlights

• Kimlun’s 2Q2019 net profit grew 36.6% Y.o.Y to RM13.4 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 49.2% Y.o.Y to RM325.2 mln. For 1H2019, cumulative net profit added 30.6% Y.o.Y to RM13.4 mln. Revenue for the period expanded 46.7% Y.o.Y to RM643.7 mln.

• The reported earnings came slightly below our expectations, accounting to 46.6% of our full year estimated net profit of RM63.0 mln. Meanwhile, the reported revenue came above our expectation, accounting to 63.6% of our full year revenue forecast of RM1.01 bln. The better-than-expected revenue was due to higher execution of its construction orderbook and improvement from the manufacturing & trading segment with deliveries to the KVMRT Line 2 project and quarry products.

• For 2Q2019 the group’s gross profit climbed 34.0% Y.o.Y to RM32.1 mln, translating to a gross profit margin was 9.9% vs. 11.0% reported in the previous corresponding quarter, dragged down by higher contribution from the Pan Borneo Highway project that yield lower margins for the construction segment.

• In 2Q2019, Kimlun’s net gearing was reduced to 43.2% (from 45.0% in 1Q2019). No dividends were declared for the quarter as the group traditionally declares dividend in the final quarter of financial year end.

Prospects

Kimlun has secured its first major construction project in 2019 for the construction of two apartment blocks in Selangor valued at RM204.4 mln. Consequently, the aforementioned project makes up to 40.9% of our orderbook replenishment assumption of RM500.0 mln for 2019 (see Appendix 1). Moving forward, earnings visibility will be supported by a healthy 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.

Elsewhere, 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.

On the property development segment, the group’s unsold property units valued at approximately RM30.0 mln from The Hyve and Taman Puteri projects will be recognised upon the completion of their sales. We also see no new property launches for the remainder of 2019, premised to the prolonged slowdown in the property market.

Valuation and Recommendation

Although the reported earnings makes up to less than half of our forecast, we deem it to be in line as we reckon earnings growth will play catch up in 2H2019. Hence, 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 6.8x and 5.9x 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 2020 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 - 30 Aug 2019