Kimlun’s 1HFY20 core loss of –RM3.2m were within ours and consensus expectations. Core loss was due to revenue slippage 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 RM370m, representing c.1.4x cover. Maintain forecasts and 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 5.7x.

Within expectations. Kimlun reported 2QFY20 results with revenue of RM94.0m (- 62% QoQ, -71% YoY) and core loss of –RM9.8m (against core earnings of RM6.6m and RM13.4m in 1QFY20 and in 2QFY19 respectively). This brings 1HFY20 performance to core loss of -RM3.2m (vs core earnings of RM29.3m in 1HFY19). Results are within ours/consensus expectations FY20 profit of RM28.6/RM26.8, as we anticipate a rebound in 2H.

Dividends. No dividends were declared for the quarter (1HFY20: nil; 1HFY19: nil).

QoQ/YoY. 2QFY20 performance sank into core loss of –RM9.8m (from core earnings of RM6.6m and RM13.4m in 1QFY20 and in 2QFY19 respectively) resulting from lower revenue (-62% QoQ, -71% YoY) due to halt in activities as MCO was imposed. Compounding the loss of revenue were lower profit margins as the same amount of fixed and recurring expenses such as depreciation, payroll and rental expenses were incurred. Management revealed that operations were substantially halted until late May.

YTD. Similarly, 1HFY20 turned core loss of –RM3.2m from core earnings of RM29.3m in 1HFY19 as topline declined by 47%. The halt in activities led to steep contraction in gross profit for construction (-70%) and manufacturing (-59%) segments.

Construction. Kimlun’s outstanding construction orderbook amounts to RM1.4bn 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. Management revealed that operations were substantially halted until late May and have resumed works in June albeit at a slower pace than pre-MCO.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM370m, representing c.1.4x cover on FY19 manufacturing revenue. We gather delivery of precast products were significantly disrupted during the MCO and is gradually normalising as resumption of construction activities has been rather slow. Going forward, we reckon Johor-based Kimlun is well positioned to secure jobs from the upcoming Rapid Transit System (RTS) of which construction should commence by Jan-21. Other potential jobs include extension of Singapore MRT rail network and North-South Corridor Expressway.

Forecast. Maintain forecasts as earnings are inline.

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 5.7x

Source: Hong Leong Investment Bank Research - 28 Aug 2020