Summary

• Kimlun Corporation Bhd’s 2QFY20 net loss stood at RM9.7m against a net profit of RM13.4m recorded in the previous corresponding quarter, 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 71.1% YoY to RM94.0m. For 1HFY20, cumulative net loss stood at RM3.1m vs. a net profit of RM29.4m recorded in the previous corresponding quarter. Revenue for the period contracted 47.3% YoY to RM339.3m.

• Even with potential recovery in 2HFY20, the reported earnings came below our expectations of net profit of RM37.6m and consensus forecast of RM26.2m. Meanwhile, the reported revenue only accounted to 35.3% of our previous full year revenue forecast of RM961.3m and 39.6% of consensus forecast of RM857.6m.

• During the Movement Control Order period, we note that Kimlun has not secured any major construction projects, which similar with the construction counterparts. The single major construction contract in 1QFY20 valued at RM92.5m accounted to 37.0% of our orderbook replenishment assumption of RM250.0m for FY20f.

• We reckon that jobs replenishment will remain lackluster for the construction of building works, particularly amongst residential buildings as developers are holding off their launches awaiting for further clarity on the property landscape post-loan moratorium period in order not to flood the already overhang existing units.

• Moving forward, Kimlun’s earnings visibility will be supported by an unbilled construction orderbook of approximately RM1.40bn (construction orderbook cover ratio of 1.4x to its 2019’s segment revenue of RM1.02bn) to sustain the segment earnings over the next 2 years. Kimlun’s manufacturing orderbook of approximately RM370.0m will sustain the segment’s earnings over the next two years.

• On the property development segment, there are no on-going projects for billings at current juncture. We note that Kimlun has recently soft launched 29 units of newly refurbished bungalows in Seksyen U10, Shah Alam with selling price of above RM2.2m per unit.

Valuation & Recommendation

• We slashed our earnings estimates by 51.7% and 15.7% to RM18.1m and RM33.1m for FY20f and FY21f respectively to reflect the slowdown in project execution under the construction segment coupled with the slower orderbook replenishment rate in coming quarters. Despite the downward revision of our earnings estimates, we maintain our BUY recommendation on Kimlun, but with lowered our fair value at RM0.87 (from RM1.02).

• Our target price is derived from ascribing an unchanged 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 - 28 Aug 2020