Results Highlights

• Kimlun’s 4Q2019 net profit fell 27.1% Y.o.Y to RM16.7 mln, dragged down by the lower margins from both the construction and manufacturing & trading segments that offset the stronger property development segment. Revenue for the quarter, however, rose 3.9% Y.o.Y to RM323.0 mln. For 2019, cumulative net profit declined 4.5% Y.o.Y to RM58.4 mln. Revenue for the year, however, added 28.7% Y.o.Y to RM1.30 bln.

• The reported earnings came slightly above our expectations, accounting to 107.0% of our full year estimated net profit of RM54.6 mln. Meanwhile, the reported revenue came above our expectation, accounting to 114.4% of our full year revenue forecast of RM1.14 bln. The stronger-than-expected performance is mianly due to higher-than-expected contribution from both the construction and manufacturing segment.

• For 4Q2019 the group’s gross profit fell 14.5% Y.o.Y to RM38.9 mln, translating to a gross profit margin was 12.0% vs. 14.3% 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 4Q2019, Kimlun’s net gearing was higher at 48.4% (from 39.2% in 3Q2019). A final single tier dividend of 3.3 sen per share was announced.

Prospects

It was another quiet period for Kimlun as it did not secure any major construction contracts in 4Q2019. Hence, the construction orderbook replenishment stood at RM413.0 mln makes up to 82.6% of our orderbook replenishment assumption of RM500.0 mln for 2019 (see Appendix 1). Moving forward, Kimlun’s earnings visibility will be supported by a healthy unbilled construction orderbook of approximately RM1.30 bln (construction orderbook cover ratio of 1.3x to its 2019’s segment revenue of RM1.03 bln) over the next 2 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 is undertaking the construction of 1 block of commercial building and 1 block of apartment at Medini, Iskandar valued at RM165.8 mln. The estimated completion period is in 2021.

Although the reported earnings came above our forecast, we trimmed our earnings estimates by 9.4% and 3.7% to RM59.4 mln and RM55.3 mln for 2020 and 2021 respectively to reflect the margins compression from 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 lowered our fair value at RM1.52 (from RM1.58). We reckon that prospective PER valuations of 6.2x and 6.7x for 2020 and 2021 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 - 28 Feb 2020