Investment Highlights

• We maintain our forecasts but downgrade our call to HOLD from BUY and cut our FV by 32% to RM1.81 (from RM2.65 previously) based on 8x FY19F EPS, to reflect a reduced benchmark forward target PE of 7-9x for smallcap construction stocks (from 10-12x previously).

• Kimlun's 1QFY18 net profit came in at only 16% of both our full-year forecast and full-year consensus estimates. However, we consider the results within expectations as 1QFY18 was affected by a slow delivery of pre-cast concrete segments to the MRT2 project. This was due to a temporary stop-work order following a mishap on the site, resulting in poor overhead absorption that hurt margins. 1QFY18 net profit declined 18% YoY for the same reason. We expect the delivery to pick up over the remaining quarters.

• Kimlun’s construction and precast concrete product divisions will not be spared the weakened prospects of the local construction sector, as the government reconsiders various mega infrastructure projects on grounds of fiscal prudence.

• Apart from the KL-Singapore High-Speed Rail (HSR) and MRT3, we believe more projects could potentially be deferred, scaled down or cancelled. Also, the introduction of a more transparent public procurement system to plug leakages will translate to lower margins for players.

• Not helping either, is the prolonged downturn in the local property market that weighs down on Kimlun’s property division.

• We take slight comfort in its construction and manufacturing order backlogs of RM1.58bil and RM360mil respectively, which will keep it busy at least for the next 1-2 years.

Source: AmInvest Research - 31 May 2018