Kimlun announced that it has entered into an agreement to acquire a 49% stake in a company costing RM40m. The company is in the midst of acquiring 43 acres of prime land in Cheras. Acquisition costs translates on a psf basis to c.RM43-50. Post-acquisition, estimated net gearing will rise to c.0.60x, which webelieve to be rather manageable. Maintain BUY with same TP of RM0.90. TP is derived after pegging FY21 EPS to a 6.8x target P/E multiple (5 year mean).Stock currently trades at an attractive FY21-22 P/E multiple of 5.6x.

NEWSBREAK

Buying land. Kimlun announced that it has entered into a share subscription agreement to acquire 9.8m shares or a 49% stake in a subsidiary of Bayu Damai Equity Sdn. Bhd. (“Subsidiary”) for RM40m. At present, the Subsidiary has an ongoing sale and purchase agreement (unconditional) with Amanahraya Development Sdn Bhd for the acquisition of 43.5 acres of freehold agriculture land situated next to an existing mixed development known as Alam Damai, Cheras, Kuala Lumpur. The transaction is expected to be completed by 4QFY20.

HLIB’s VIEW

Financial impact. Under the agreement, Kimlun’s purchase price for its ownership share of the land translates to an attractive RM43-50 psf, especially considering the land is located at a prime and matured area. Post-acquisition, Kimlun’s estimated net gearing will rise from 0.55x (as at 1Q20) to c.0.60x, which we believe to be rather manageable.

Development details. Development comprising of apartments, condominiums as well as shop lots with a preliminary GDV and GDC estimates of RM2.2b and RM1.94b would sit on the acquired land. Kimlun has guided that development will commence in 2022 spanning over a period of 10-15 years depending on prevailing market conditions.

Outlook. Kimlun’s outstanding construction and manufacturing orderbook amounts to RM1.4b (1.4x cover) and RM280m (1.0x cover). Going forward, we reckon Johor based Kimlun is well positioned to secure jobs from the upcoming Rapid Transit System (RTS) of which construction works are slated to begin in Jan -21. We estimate roughly RM2.2b-2.6b worth of civil works are up for grabs for the Malaysian portion. Additionally, manufacturing 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. Maintain forecasts due to the long term nature of the planned development.

Maintain BUY, TP: RM0.90. Maintain BUY with same TP of RM0.90. Our TP is derived based on FY21 earnings to reflect a more normalised earnings for the company as well as pegging to a 6.8x target P/E multiple (5 year mean). Stock currently trades at an attractive FY21 & 22 P/E multiple of 5.6x.

Source: Hong Leong Investment Bank Research - 11 Aug 2020