News

Kimlun has decided to dispose 9 parcels of freehold agriculture land measuring 17.3 ha in Nilai to Bina Plastic Industries S/B for RM46.5m (RM25.0/sq ft). The deal is expected to be completed by 1QCY14.

Highlights

Positive disposal… We are positive on this development as it will help improve Kimlun’s gearing level and channel its resources in executing and delivering its huge order book in both the construction and manufacturing division as opposed to being tied up as land holding cost. We deem the selling price (RM25.0/sq ft) fair for agriculture land selling in the vicinity area.

Land recap… To recap, the land was acquired in Nov-11 for RM27.4m (RM14.7/sq ft) for the purpose of industrial/factory development. Hence, this land investment has resulted a gain of 70%, which is a good move by the management.

Financial impact… The land disposal will see Kimlun post a disposal gain of RM10.7m (4.4 sen/share) in FY14. However, we treat this as a non-recurring item. More importantly, its net debt levels will improve from RM167.8m to RM121.3m, whereby net gearing reduce from 59.6% to 42.3% (based on 1HFY13 numbers).

EPS improvement… Back-of-the-envelope calculation suggests that interest savings will raise our FY14 and FY15 earnings forecasts by 2.2% and 4.1% to RM62.0m (25.8 sen/share) and RM67.9m (28.2 sen/share) respectively.

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, pending conclusion of the land disposal.

Rating

HOLD

Although Kimlun had a good year in terms of contract wins, we are maintaining our HOLD call until we see indications of construction margins recovery and digestion of its new manufacturing facilities.

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 maintain conservative by maintaining our TP of RM1.76 based on unchanged 10x FY13 earnings.

Source: Hong Leong Investment Bank Research - 30 Oct 2013