Investment Highlights

• We cut our FY18-20F net profit forecasts by 33%, 29% and 23% respectively, reduce our FV by 19% to RM1.30 (from RM1.61) based on 9x revised FD FY19F EPS, in line with our benchmark forward target PE of 7-10x for small-cap construction stocks. We maintain our HOLD call.

• Kimlun's 1HFY18 net profit is disappointing, coming in at only 33% of both our full-year forecast and full-year consensus estimates. We believe the variance against our forecast came largely from: (1) weaker-than-expected construction progress billings; and (2) margin erosion at both the construction and precast concrete product divisions as Kimlun was unable to effectively contain the rising costs. We have adjusted our forecasts accordingly.

• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We believe Kimlun is mitigated by its construction and manufacturing order backlogs of RM1.7bil and RM400mil respectively, which will keep it busy at least for the next 1- 2 years, coupled with its proven ability to compete under an open bidding system.

• Similarly, we are also cautious on Kimlun’s other key businesses such as precast concrete product (due to the slowdown in the construction sector) and property development (due to the prolonged downturn in the local property market).

Source: AmInvest Research - 30 Aug 2018