Investment Highlights

• We cut our FY18-20F earnings forecasts by 16%, 11% and 16% respectively, reduce our FV by 11% to RM1.61 (from RM1.81) but maintain our BUY call. Our FV is based on 8x revised FY19F EPS, in line with our benchmark forward target PE of 7-9x for small-cap construction stocks.

• Speaking to the press after Kimlun’s AGM last Friday, CEO Sim Tian Liang guided for “flat top and bottom line growth” in FY18 due to “escalating trade war between China and the US” and “costlier fuel cost, steel price and wages”, partially mitigated by savings from the abolishment of the GST.

• We now project Kimlun’s FD EPS to stay relatively flat in FY18F (vs. a 19% growth we forecast previously) to bring ourselves in line with its latest profit guidance.

• The prospects of the local construction sector are unfavourable, as the government reconsiders 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 6.7x its FY19F FD EPS, which is below our benchmark forward target P/E of 7-9x for smallcap construction stocks.

• We also 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 - 25 Jun 2018