Highlights

We attended Kimlum’s FY12 briefing chaired by the CEO, Ir. Sim, and the management team. Below are the key takeaways:

Margin compression… As highlighted in Kimlun’s 1HFY13 results note (kindly refer to our report “2Q results: Indigestion”, dated 30 Aug-13), the construction GP margin which compressed to 7.5% from 8.7% was due to timing difference in profit recognition for its construction projects. We believe that its GP margin should recover as the progress for its huge order book peaks especially contracts which are of larger ticket size.

Record RM1bn… Kimlun has secured RM1.08bn worth of jobs YTD and is hoping to secure additional smallish projects worth RM50m-100m. We believe that contract newsflow for its construction division should slowdown given the record high of construction projects in hand. The division will be busy executing its outstanding order book of RM1.63bn, which translates to 2.0x FY12’s construction revenue.

Eyeing Thomson line… The next precast project that will keep its manufacturing line busy will be Singapore’s MRT Thomson Line project. Management has already invested to upgrade their manufacturing facilities in order to meet the technical specifications required for this project. We believe Kimlun will be a key supplier of Tunnel Lining Segment and Segmental Box Girder products for Thomson Line worth >S$100m.

Medini next year… We were positively surprised that Kimlun intends to launch its Medini property project by next year, which has a GDV of ~RM450m. Meanwhile, its maiden development – the Hyve, Cyberjaya (51% stake), which has a GDV of RM240m, has achieved a combined bookings/take-up rate of 70%.

Recapitalise… Given Kimlun’s expansion plan and higher working capital requirements to fund its huge order book, manufacturing facilities, and property venture, we do not discount the possibility of a rights issue to recapitalise its balance sheet. As of 1HFY13, Kimlun has a net debt of RM167.8m, translating to a net gearing of 59.6%.

Risks

Execution risk; Regulatory and political risk (both local and abroad); Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

Unchanged.

Rating

HOLD

Positives: (1) Bigger than expected contract wins. (2) Recovery in earnings margin. (3) Contribution from Cyberjaya property development.

Negatives: (1) Longer than expected gestation period of new manufacturing facilities. (2) Sharp slowdown in the property sector which may affect existing property-related projects.

Valuation

Although consensus has rolled over their valuation to FY14 earnings (hence the higher TP), we prefer to remain conservative by maintaining our TP of RM1.76 based on unchanged 10x FY13 earnings.

Source: Hong Leong Investment Bank Research - 11 Sep 2013