Highlights

Below are the key takeaways from Kimlun’s briefing:

Working capital… To recap, Kimlun has proposed 1 rights share for every 4 existing shares held attached with a free 10-year warrant to raise RM66.1m (kindly refer to our report “Rights to expand” dated 1 Nov-13) coupled with the Nilai land disposal for RM46.5m (kindly refer to our report “Timely land sale” dated 30 Oct-13). The total sum of RM112.6m raised will be for execution of its construction projects, manufacturing facilities and property developments in Cyberjaya and Medini.

Construction constraint… The construction division has been Kimlun’s Achilles’ heel. Execution has been slow as projects in Johor, which makes up a large portion of the order book, have been hit by the lack of foreign labour, specialist contractors and heavy machineries. GP margin for the division has been on a down trend from +10% to 5%. We expect this trend to persist over the next few quarters given higher material and labour cost. The division has an outstanding order book of RM1.85bn, translating to a run rate of 2.3x FY12’s construction revenue.

Manufacturing relief… Manufacturing division’s performance has been within our expectations. As Johor’s plants are already 100% utilised, the Senawang plant will be used to cater for Singapore’s MRT Thomson Line precast orders. This is to avoid setting up a new plant in Johor and idling cost in view of the potential delays in KVMRT Line 2 project. However, additional logistic costs will trim 5% off margins, but still be profitable overall.

Better in Medini?... Despite the property headwinds, management feels that take-up rates for developments in Medini should fare better given the exemption in foreign restriction. Kimlun’s Medini will be carried out in 2 phases in end 2014 with a GDV of RM447m for 865 units of SOHO and retail units.

EPS neutral... We believe earnings should rebound in FY14 by 14-18% from FY12 earnings (FY13 earnings excluded due to poor performance). Earnings rebound will be mainly from its Cyberjaya developments and this will mitigate the earnings dilution impact of 20% arising from the rights issue.

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

Currently, Kimlun is experiencing growing pains and the proposed fund raising will allow it to emerge stronger with a recapitalised balance sheet instead of relying on borrowings. In view of the attractive discount of RM1.10 rights issue subscription price and potential further upside from the free warrants, we are favourable on taking up the rights issue for existing shareholders. However, we are maintaining our HOLD call on to the stock at this price level.

Valuation

Maintain TP of RM1.76 (theoretical ex-rights TP of RM1.63) based on unchanged 10x mid-FY14 earnings.

Source: Hong Leong Investment Bank Research- 20 Dec 2013