Investment Highlights

• We maintain our forecasts, FV of RM1.81 and BUY call. Our FV is based on 8x FY19F EPS, in line with our benchmark forward target PE of 7-9x for small-cap construction stocks.

• Kimlun has secured a RM53.5mil contract for basic infrastructure works (earthworks, site works, roads and drainage) for Gerbang Nusajaya Development in Johor. This is the second key construction job Kimlun has secured in FY18, boosting its YTD construction job wins to RM197.6mil and its outstanding construction order book to about RM2bil. We are keeping our forecasts that assume construction job wins of RM700mil annually in FY18-20F.

• The prospects of the local construction sector are unfavourable, as the government is reconsidering various mega infrastructure projects on grounds of fiscal prudence. Apart from the KL-Singapore high-speed rail (HSR) and MRT 3, we believe more mega projects could potentially be deferred, scaled down or cancelled.

• However, we believe the selldown on Kimlun shares after the 14th general election has been overdone. At present, the stock trades at only 6x its FY19F fully-diluted EPS, which is below our benchmark forward target P/E of 7-9x for small-cap construction stocks.

• We take comfort in Kimlun’s construction and manufacturing order backlogs of RM2bil and RM421mil respectively, which will keep it busy at least for the next 1- 2 years. Despite the cutbacks on local public jobs, we believe Kimlun’s earnings could be sustained as it depends largely on private sector building jobs coupled with recurring orders for its precast concrete segments from infrastructure projects in Singapore.

Source: AmInvest Research - 21 Jun 2018