Kimlun announced that it had been awarded a contract for the building works for 2 blocks of apartments by Bukit Indah Sdn. Bhd worth a sum of RM92.5m. Kimlun’s outstanding construction orderbook increases to RM1.6b, translating to a healthy cover ratio of 2.0x to FY18 construction revenue. Kimlun’s manufacturing orderbook stands at RM240m, representing c.1.2x cover on FY18 manufacturing revenue. We cut FY20-21 earnings by 14-18% after factoring a delay in normalisation of construction margins. Maintain BUY rating with lower TP of RM1.19 (from RM1.40). TP is pegged to 8x FY20 earnings.

NEWSBREAK

First job win in FY20. Kimlun announced that it had been awarded a contract for the building works for 2 blocks of apartments and ancillary facilities in Iskandar, Johor by Bukit Indah Sdn. Bhd. (a wholly owned subsidiary of SP Setia Berhad) worth a sum of RM92.5m. The project is expected to be completed by 3Q20.

HLIB’S VIEW

Decent start. This contract marks the first award secured by the company in FY20. Kimlun’s outstanding construction orderbook increases to RM1.6b, translating to a healthy cover ratio of 2.0x to FY18 construction revenue. We reckon Johor-based Kimlun is well positioned to secure jobs from the upcoming Rapid Transit System (RTS). Nonetheless, the bilateral agreement to commence the project may see further delay (slated to be signed by April-20).

Manufacturing segment remains the spark. Manufacturing segment recorded an impressive performance (revenue +76% as at 9M19) due to higher revenue from MRT2 project and higher volume of quarry products supplied to the PBH Sarawak. Kimlun’s manufacturing orderbook stands at RM240m, representing c.1.2x cover on FY18 manufacturing revenue. According to management, manufacturing job wins are expected to be in the range of RM80-120m. Going forward, the company intends to ride on Singapore’s infrastructure spending over the medium term with job wins likely to be driven by the extension of Singapore MRT rail network and North-South Corridor Expressway. Tender awards from these projects are likely to come in FY20.

Forecast. Despite the contract win, we reckon with the delays so far in the rollout of domestic infra projects and precast awards, lower margin building jobs secured earlier may continue to form the bulk of its earnings moving forward. Hence, we cut FY20-21 earnings by 14.4% and 17.8% after factoring a delay in normalisation of construction margins.

Maintain BUY, TP: RM1.19. Maintain BUY rating with lower TP of RM1.19 (from RM1.40). TP is pegged to 8x FY20 earnings. Kimlun remains appealing for its execution capability and undemanding valuations.

Source: Hong Leong Investment Bank Research - 25 Feb 2020