Results Highlights

• Kimlun’s 3Q2019 net profit decreased 21.7% Y.o.Y to RM12.3 mln, dragged down by the margins compression on both the construction and manufacturing & trading segments that offset the stronger property development segment. Revenue for the quarter, however, climbed 28.1% Y.o.Y to RM336.1 mln. For 9M2019, cumulative net profit rose 9.1% Y.o.Y to RM41.7 mln. Revenue for the period grew 39.7% Y.o.Y to RM979.8 mln.

• The reported earnings came below our expectations, accounting to 66.2% of our previous full year estimated net profit of RM63.0 mln. Meanwhile, the reported revenue came above our expectation, accounting to 94.3% of our full year revenue forecast of RM1.04 bln. The lower-than-expected bottomline was due to lower margins from the execution of construction projects.

• For 3Q2019 the group’s gross profit fell 8.8% Y.o.Y to RM28.5 mln, translating to a gross profit margin was 8.5% vs. 11.9% reported in the previous corresponding quarter, dragged down by higher contribution from the Pan Borneo Highway project that yields lower margins for the construction segment.

• In 3Q2019, Kimlun’s net gearing was reduced to 39.2% (from 43.2% in 2Q2019). No dividends were declared for the quarter as the group historically declares dividend in the final quarter of financial year.

Prospects

It was an unusually quiet period for Kimlun as it did not secure any major construction contracts in 3Q2019. Nevertheless, construction contracts wins YTD amounting to RM204.4 mln 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 RM1.50 bln (construction orderbook cover ratio of 1.9x to its 2018’s segment revenue of RM801.1 mln) over the next 2-3 years.

Elsewhere, Kimlun’s manufacturing orderbook of approximately RM240.0 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 RM27.0 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.

With the reported earnings coming below our forecast, we trimmed our earnings estimates by 13.5% and 10.5% to RM54.5 mln and RM65.3 mln for 2019 and 2020 respectively to reflect the margins compression in the construction and manufacturing & trading segments.

Valuation and Recommendation

Despite the downward revision of our earnings estimates, we maintain our BUY recommendation on Kimlun with a lower target price of RM1.58 (from RM1.65). We reckon that prospective PER valuations of 8.0x and 6.7x 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 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 - 29 Nov 2019