Kimlun’s 1QFY20 earnings of RM6.6m (-61% QoQ, -59% YoY) were above ours but below consensus expectations. Core PATAMI declined due to loss of revenue resulting from halting operations during the MCO. Kimlun’s outstanding construction orderbook now stands at RM1.4bn, translating to a decent cover ratio of 1.4x. Its manufacturing orderbook stands at RM280m, representing c.1.0x cover. Increase FY20 earnings by 41.5%. Upgrade the stock to a BUY from Hold with higher TP of RM0.90 (from RM0.52). The higher TP is derived after rolling forward earnings to FY21 pegged to a 6.8x target P/E multiple (5 year mean). Stock current trades at an attractive FY21 & 22 P/E multiple of 5.5x and 5.4x respectively.

Above expectations. Kimlun reported 1QFY20 results with revenue of RM245.3m (- 24% QoQ, -23% YoY) and core earnings of RM6.6m (-61% QoQ, -59% YoY). The core earnings accounted for 33% of our full year forecast (consensus: 14%) which is above ours but below consensus expectations.

Dividends. No dividends were declared for the quarter (1QFY19: nil).

Deviations. The results beat were top-line driven as we were too conservative on progress billings assumptions in attempts to factor in the MCO impact.

QoQ. Core PATAMI decreased by -61% mainly due to operations being halted by the MCO (starting 18th March) whereby only critical works such as slope protection and delivery of products for critical works were permitted of which we understand were minimal in value. Compounding the loss of revenue were lower profit margins (net profit margin: -2.5 ppts) as the company continued to incur fixed overheads.

YoY. Likewise, core PATAMI declined by -59% mainly resulting on halting operations as the MCO was enforced. In addition to the topline pressure, net profit margin declined by 2.3% as expenses such as depreciation, payroll and rental expenses continue to be incurred. The quarter also saw higher finance costs incurred from higher drawdown on banking facilities

Construction. Kimlun’s outstanding construction orderbook amounts to RM1.4b which translates to 1.4x cover based on FY19 construction revenue. Recall that in early 2020, Kimlun secured a RM92m contract for the construction of apartments in Johor. Works at its construction sites has gradually recommence since 4 May but efforts to normalise to pre-MCO productivity levels are currently hampered by SOP measures. Going forward, we reckon Johor-based Kimlun is well positioned to secure jobs from the upcoming Rapid Transit System (RTS) of which a decision is to be made by 31 July 2020.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM280m, representing c.1.0x cover on FY19 manufacturing revenue. Contracts anticipated to be secured this year include extension of Singapore MRT rail network and North South Corridor Expressway. Based on previous guidance, award size ranges between RM80-120m and were anticipated to come in by FY20.

Forecast. Raise FY20 earnings by 41.5% as the MCO impact was less profound than initially expected.

Upgrade to BUY, TP: RM0.90. We upgrade the stock to a BUY from HOLD with higher TP of RM0.90 (from RM0.52). The higher TP is derived after rolling forward earnings to FY21 to reflect a more normalised earnings base for the company as well as pegging to a 6.8x target P/E multiple (5 year mean). Stock current trades at an attractive FY21 & 22 P/E multiple of 5.5x and 5.4x respectively.

Source: Hong Leong Investment Bank Research - 29 Jun 2020