Summary

• Kimlun’s 1QFY20 net profit fell 58.6% YoY to RM6.6m, due to the shutting down of the operations except for the minimum permitted critical works such as slope protection and delivery of products for permitted critical works. Revenue for the quarter declined 23.0% YoY to RM245.3m.

• The reported earnings came below our expectations, accounting to 13.6% of our full year estimated net profit of RM48.4m. Meanwhile, the reported revenue also came below our expectation, accounting to 19.6% of our full year revenue forecast of RM1.25bn. The weaker-than-expected performance was mainly due lower contribution across both the construction and manufacturing & trading segments.

• We note that Kimlun has secured one major construction contract in 1QFY20 valued at RM92.5m, making up to 37.0% of our orderbook replenishment assumption of RM250.0m for FY20. Although the figure makes up to less than half of our expectations, we believe that orderbook replenishment will pace up in 2HFY20, particularly from mega-infrastructure projects.

• Moving forward, Kimlun’s earnings visibility will be supported by a healthy unbilled construction orderbook of approximately RM1.40bn (construction orderbook cover ratio of 1.4x to its 2019’s segment revenue of RM1.03bn) to sustain the segment earnings over the next 2 years.

• Elsewhere, Kimlun’s manufacturing orderbook of approximately RM280.0m, 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, there are no on-going projects at current juncture. Moving forward, Kimlun plans to launch the newly refurbished bungalows in Seksyen U10, Shah Alam in 2HFY20, depending on the property market condition.

Valuation & Recommendation

• We trimmed our earnings estimates by 20.2% and 14.3% to RM38.7m and RM47.4m for FY20 and 2FY21 respectively to reflect the delay in project execution under the construction segment coupled with the supply chain disruption on the manufacturing segment. Despite the downward revision of our earnings estimates, we maintain our BUY recommendation on Kimlun, but with lowered our fair value at RM1.02 (from RM1.25). We reckon that prospective PER valuations of 6.4x and 5.2x for FY20 and FY21 respectively are very attractive, being at the lower-end of the small-mid size construction peers average of 9.0x.

• Our target price is derived from ascribing an unchanged target PER of 9.0x to its FY21 fully diluted construction earnings and PER of 6.0x (unchanged) to its fully diluted manufacturing earnings, while its property development segment’s valuation pegged at 0.4x its BV due to its relatively small-scale development projects.

• 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 Jun 2020