Investment Highlights

• We maintain our forecasts, FV of RM2.65 and BUY call, following an analyst briefing today. Our FV is based on 12x FY18F FD EPS, which is in line with our 1-year forward target PE of 10-12x for small-cap construction stocks.

• Kimlun guided for potential construction job wins of RM600-900mil in FY18F (which is consistent with our assumption of RM700mil annually in FY18-20F), vs. RM980mil achieved in FY17 (which was considered a bumper year). Kimlun expects these to come mainly from affordable housing projects.

• With the Johor state being its home turf, Kimlun is hoping to garner a slice of action in the Gemas – Johor Bahru electrified double-tracking rail project (RM7.5bil). Kimlun could bid for both infrastructure subcontracts as well as supply contracts for precast concrete products for the project. While Kimlun is bullish on the East Coast Rail Link (ECRL) project (mainly for supply contracts for precast concrete products), it noticed that the actual rollout of the project could be challenging given various issues such as land acquisitions and changes in the alignment (including adding spur lines to the main alignment). Kimlun played down its chances in getting Pan Borneo Sabah Highway work packages as it has yet to identify a "suitable" local JV partner.

• At present, its outstanding construction order book stands at RM1.8bil, which will keep it busy for the next two years. Meanwhile, its manufacturing order backlog currently stands at RM340mil, comprising largely contracts to supply segmental box girders and tunnel lining segments to the MRT2, and orders for tunnel lining segments, jacking pipes and sleepers from various infrastructure projects in Singapore. Our forecasts assume annual turnover of RM160-200mil for the division in FY18-20F, vs. RM98mil achieved in FY17 (a trough year) and RM178mil in FY16 (a bumper year).

• We continue to like Kimlun as it is a good proxy to the booming local construction sector given its involvement in the MRT2 (supply of precast concrete segments), Pan Borneo Sarawak Highway and the construction of affordable housing. Kimlun's earnings profile has improved tremendously as it no longer relies solely on building jobs, but has expanded to infrastructure (Pan Borneo Sarawak Highway). Similarly, its manufacturing unit has widened its product offering with the latest being rail sleepers and parapet walls. It is poised to become a key supplier of precast concrete products such as tunnel lining segments and sleepers to the ECRL and KL Singapore High-Speed Rail projects.

Source: AmInvest Research - 13 Mar 2018