Summary

• Kimlun Corporation Bhd will pay RM40.0m cash for a 49.0% stake in property developer Bayu Damai Sdn Bhd (BESB), which is in the midst of acquiring nine plots of land in Alam Damai, spanning 43.5-ac. for RM95.0m.

• BESB is planning to undertake a mixed development with a gross development value (GDV) of RM2.20bn in 2022. BESB counts Puan Sri Teng Siew Kean, who is the spouse of Melati Ehsan Holdings Bhd founder Tan Sri Yap Suan Chee, as one of its joint shareholders. The proposed development is expected to take 10-15 years for completion, subject to the property market condition.

• Meanwhile, the gross development cost (GDC) is expected to come at RM1.94bn will see a net development value of approximately RM260.0m or recognition of approximately RM17.3m-26.0m per annum (assuming full take-up rate) when billing starts to peak. This will translate to approximately RM8.5m-12.7m for Kimlun after taking into account of the 49.0% equity stake.

• We view the move as neutral with the price tag of approximately RM43.10psf, which is close to the average land price transacted cost around the area. We reckon that the property sector overhang will remain in place premised to the miss-match of wages growth and property market value over the years. Still, the move is expected to be earnings accretive for Kimlun’s property development segment over the longer term.

• Moving forward, Kimlun’s earnings visibility will be supported by an unbilled construction orderbook of approximately RM1.20bn to sustain the segment earnings over the next two years. Elsewhere, Kimlun’s manufacturing orderbook of approximately RM200.0m will also sustain the segment’s earnings over the next two years.

Valuation & Recommendation

• With the contribution only will come beyond FY22f, coupled with the impending release of 2QFY20 results, we made no changes to our earnings forecast. We maintained our BUY recommendation on Kimlun with an unchanged fair value at RM1.02. We reckon that prospective PER valuations of 6.7x and 6.3x for FY20f and FY21f 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 a target PER of 9.0x to its FY21f 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. Any 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 - 11 Aug 2020