News

To propose rights issue of up to 60.1m Rights Shares on the basis of 1 Rights Share for every 4 existing shares held whereby each Rights Share will be attached with a free Warrant.

The rights issue price is RM1.10/share, representing a 40% discount to the theoretical ex-rights price (TERP) of RM1.83. The warrants will have a 10-year exercise period, whereby each warrant is entitled to exchange for 1 new Kimlun Share based on an indicative exercise price of RM1.77. The entire exercise is expected to be completed by 1QCY14.

Highlights

Positive rights… We are POSITIVE on this exercise to recapitalise its balance sheet in order to facilitate Kimlun’s expansion plans instead of relying on borrowings for funding (kindly refer to our report “Waiting to digest” dated 11 Sep- 13).

Financial impact… This exercise will raise RM66.1m (not including potential cash raised from warrants) and coupled with the recent RM46.5m Nilai land sales (kindly refer to our report “Timely land sale” dated 30 Oct-13), its net debt position will improve to RM55.2m from RM167.8m, whereby net gearing will reduce to 17.3% from 59.6% (based on 1HFY13 numbers).

Lower EPS… Back-of-the-envelope calculation suggests that our FY14 and FY15 EPS forecasts will be reduced by 20% to 20.2 sen/share and 21.7 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 rights issue.

Rating

HOLD

Despite our HOLD call, we recommend longer term investors to subscribe to this exercise as Kimlun will emerge stronger with a recapitalised balance sheet.

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 (theoretical ex-rights TP of RM1.63) based on unchanged 10x FY13 earnings.

Source:Hong Leong Investment Bank Research- 1 Nov 2013